Options traders are betting on a dramatic drop in interest rates

By Christine Idzelis

Recent options activity points to bullish positioning for long-term bonds and utilities

Rising interest rates and AI are two powerful forces in U.S. markets lately.

Investors are aggressively betting on a sudden turnaround in interest rates, and they're using call options on exchange-traded funds tied to utilities stocks and long-dated Treasury bonds to do it.

Trading volume in call options tied to popular ETFs like the iShares 20+ Year Treasury Bond ETF TLT and the State Street Utilities Select Sector SPDR ETF XLU has surged recently, according to Dow Jones Market Data.

Both long-dated bonds and interest-rate-sensitive utilities stocks had come under pressure as yields on 10-year and 30-year Treasurys climbed to their highest levels in decades. The past few years have seen several examples where falling Treasury yields spurred a sudden rally in bonds and rate-sensitive stocks, a group that also includes home builders and small caps.

"If you see call-option volume expand, it usually means there's a bullish view on the underlying product," said Steve Sosnick, chief strategist at Interactive Brokers, in a phone interview. "If that underlying product is TLT, it's telling you that there are bond bulls," he said, referring to the ticker for the iShares 20+ Year Treasury Bond ETF.

Call options give investors the right, but not the obligation, to buy a certain security at a specified price by a certain date.

A jump in call-option trading volume that suggests bullishness for TLT is "very straightforward," as it reflects traders' expectations for long-term interest rates to come down, according to Sosnick. The stock market's utilities sector XX:SP500.55 has traditionally benefited from lower rates.

"Utilities are typically a very rate-sensitive area," Sosnick said - although the artificial-intelligence boom has in some cases changed what traditionally drives bullish behavior in the sector, he added.

See related: Google makes a fresh bet on nuclear power as the AI energy crunch intensifies

The State Street Utilities Select Sector SPDR ETF slipped less than 0.1% on Wednesday to close almost flat, FactSet data showed. Still, shares of the ETF have dropped around 10% over the past 3 months, leaving it with a total loss so far in 2026 of 1.6% through Wednesday.

Utilities have traditionally appealed to investors because of their dividend payouts, but those payments can look less attractive compared to bonds when interest rates rise, said Sosnick.

Longer-term Treasury rates have recently risen to the highest level in decades, with the yield on the 10-year Treasury note BX:TMUBMUSD10Y settling at 5.276% on Wednesday and the 30-year Treasury rate BX:TMUBMUSD30Y finishing at 5.660%. The rate on the shorter-term 2-year Treasury note BX:TMUBMUSD02Y declined to 4.762% on Wednesday, after recently rising to multiyear highs. Bond yields and bond prices move in opposite directions.

September's surge in Treasury yields led to the iShares 20+ Year Treasury Bond ETF 'sworst monthly performance on a total-return basis since December 2024, deepening its third-quarter loss to almost 9%, FactSet data show.

The iShares 20+ Year Treasury Bond ETF slipped 0.2% on Wednesday, bringing the fund's total loss so far this year to around 8.4%, FactSet data showed, at last check.

The U.S. stock market ended lower Wednesday, with the S&P 500 SPX and Nasdaq Composite Index COMP each retreating from their record closing highs booked the day before. While the stock market has at times stumbled over the fast recent rise in Treasury rates, enthusiasm for technology stocks and AI has helped push those two major indexes higher.

Interest rates aren't the only factor driving interest in utilities. Recently, many utilities stocks have gotten wrapped up in the AI trade because of the massive amounts of power required for data centers to function, Sosnick noted.

Signs of optimism over utilities stocks in the options market could partly reflect that "people are super bullish about the outlook for utilities because of the AI build-out," he said.

Sosnick pointed to Constellation Energy (CEG), whose shares have surged this week after its deal to sell nuclear power to Google parent Alphabet (GOOGL) (GOOG). Constellation was the second-biggest holding of the State Street Utilities Select Sector SPDR ETF as recently as Tuesday, with a weight of 7.6%.

-Christine Idzelis

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10-07-26 1636ET