Bond Yields Pull Back After A Weak Jobs Report. Options Traders Had Already Started Positioning For Relief.
U.S. Treasury yields pulled back from this week’s highs Friday, adding to signs that some traders had already begun positioning for relief from the recent bond-market sell-off.
The benchmark 10-year Treasury yield fell to about 5.18% before pairing losses. The move followed a weaker-than-expected September employment report, which showed payroll growth slowing sharply, according to the U.S. Bureau of Labor Statistics.
The more unusual signal, however, had appeared a day earlier in the options market.
About an hour after Thursday’s opening bell, options volume in the Utilities Select Sector SPDR Fund, or XLU, surged to roughly 10 times its 30-day average, based on Cboe LiveVol data and SpotGamma figures.
The activity included a roughly $1 million position in which a trader sold 5,000 January puts with a $39 strike for about $695,000 and sold an equal number of January calls with a $42 strike for about $400,000. XLU was trading just above $39 when the position was established.
The structure would generate its maximum payout if XLU finishes between $39 and $42 when the contracts expire. Rather than requiring a major rally, the position favors the utility fund stabilizing or recovering modestly.
Utilities are particularly sensitive to interest rates because many companies in the sector pay relatively high dividends. Rising Treasury yields can make government debt more competitive with dividend-paying stocks, while falling yields can ease that pressure.
Options positioning around XLU also began shifting away from puts and toward calls. Put volume relative to calls reached 2.67 late last month, its highest level since May, before declining. On Thursday, traders likely bought about 74,000 calls compared with roughly 4,500 puts, according to SpotGamma figures cited in the report.
Another large position appeared later Thursday in short-term interest-rate derivatives.
A trader bought 100,000 March 96/96.125 call spreads on SOFR futures in a transaction valued at about $4.4 million, according to trading-floor information obtained by CNBC. The underlying contracts were trading around 95.51 at the time.
SOFR futures allow investors to manage or take positions on short-term U.S. interest rates. CME Group explains that Three-Month SOFR futures are priced using an index equal to 100 minus the expected or realized compounded SOFR rate. Higher futures prices therefore correspond with lower underlying rates.
The call-spread position would benefit if short-term rates moved lower.
“Massive call buying today, big volume in here today ahead of jobs report tomorrow,” a floor trader who discussed Thursday’s transaction on condition of anonymity told CNBC. The trader also pointed to the rally that followed the 10-year Treasury yield’s move above 5.3%.
The activity followed a difficult stretch for long-duration bonds. The iShares 20+ Year Treasury Bond ETF, or TLT, had come under pressure as longer-term yields climbed, reflecting the inverse relationship between bond prices and yields.
TLT holds U.S. Treasury securities with remaining maturities of more than 20 years, leaving it particularly sensitive to shifts in long-term rates.
