TLT call buying surges to 175,000 as bond rout fades

Options traders bought more than 175,000 bullish calls in the iShares 20+ Year Treasury Bond ETF on Tuesday, wagering the year-long bond rout is ending.

"There's less concern about a hike," said Jeff Schuh, head of the interest rates desk at Constitution Capital, noting that recent positions betting on a Federal Reserve tightening are being liquidated.

One large trader bought 10,000 85-strike calls in TLT expiring Nov. 20 for $1 million, then sold 15,000 90-strike calls expiring the same day for $375,000 — a bullish call spread with a maximum payout 8 percent higher at levels not seen since March. The fund added 0.9 percent Tuesday to $83.30, its highest since July 29, while the iShares iBoxx $ Investment Grade Corporate Bond ETF rose 0.5 percent.

A rally in long-duration bonds would push down yields on the long end of the Treasury curve, a welcome development for equity investors after the 30-year yield touched a 19-year high last week. The week brings three tests: the Fed's preferred inflation gauge, PCE, due Wednesday morning, Nvidia's earnings after the bell Wednesday, and the Jackson Hole Economic Policy Symposium beginning Thursday.

Rate-Hike Odds Halve as Data Cools

The bullish bond positioning comes as traders have all but priced out a September rate hike. Interest rate swaps now price nine basis points of a quarter-point hike into the Sept. 16 policy meeting, down from roughly 68 percent odds two weeks ago, after July nonfarm payrolls showed the U.S. economy unexpectedly lost 23,000 jobs and consumer inflation cooled to 3.4 percent year over year. July retail sales also fell by the most in more than a year.

The dovish wagers stand in contrast to the recent move in long-dated Treasuries, where the 30-year yield surged to 5.31 percent earlier this week, its highest since 2007, before easing after Treasury Secretary Scott Bessent signaled the government could draw on its nearly $1 trillion General Account to fund bond buybacks rather than increase issuance. The 10-year note yield remains below its January 2025 high and the 5 percent level it pierced in 2023.

Nvidia Earnings, Jackson Hole Loom

The bond positioning carries direct implications for equities. Options traders are pricing a 5.4 percent move in Nvidia's shares after Wednesday's earnings report, a swing of about $280 billion in market value, as investors seek fresh insight into AI demand and hyperscaler capital spending. Nvidia shares have fallen for seven consecutive sessions but remain up 11.7 percent this year, while the S&P 500 has gained 11.8 percent and the Philadelphia Semiconductor index has climbed 61 percent.

Nvidia probably has "a pretty good pulse on the hyperscaler capex trajectory," said Will Sterling, chief investment officer at TritonPoint Wealth. "Return on investment from the hyperscalers is really important. That will dictate whether or not they continue to invest with their capex."

Fed Chair Kevin Warsh's debut speech at Jackson Hole, scheduled for Aug. 27-29, adds another layer of uncertainty. Warsh has deliberately reduced forward guidance compared with his predecessor, telling markets to interpret macroeconomic data themselves. A Bank of America survey shows fund managers are the most bullish since November 2021, with cash levels at 3.5 percent and global equity allocations at a net 56 percent overweight, even as the bond market sends a different message.

This article is for informational purposes only and does not constitute investment advice.