Hidden Signals in the Options Market: The End of the Bond Selloff?

The options market is offering a subtle hint that the bond selloff that has pushed yields to their highest levels in months may be nearing exhaustion. On Thursday (1/10), two large trades in the utilities sector and short-term interest rate futures caught market participants' attention, suggesting that some traders are starting to bet on a reversal.

The first trade occurred in the Utilities Select Sector SPDR ETF (XLU), which tracks the performance of utility stocks. About an hour after the opening bell, XLU options volume surged to ten times the 30-day average, according to CBOE LiveVol and SpotGamma data. A trader sold 5,000 put contracts with a strike price of 39 expiring in mid-January worth US$695,000, while buying 5,000 call contracts with a strike price of 42 with the same expiry worth US$400,000. With XLU trading just above US$39 at the time of the trade, this position is a bet that the price will move between US$39 and US$42 through expiry.

While not an aggressive bet on a rally, the move reflects confidence that the utilities sector—which is highly sensitive to interest rates because its dividend yields compete with bonds—has reached a bottom. The 30-day correlation between XLU and the 10-year US Treasury yield stood at -0.94, meaning the two almost always move in opposite directions. Last week, the put-to-call volume ratio in XLU briefly touched 2.67, the highest since May, before falling sharply. In Thursday's session, about 74,000 call contracts were bought, while only 4,500 puts traded, according to SpotGamma.

The second signal came from the Chicago Mercantile Exchange trading floor. Near the close, a trader bought 100,000 call spread contracts on SOFR (Secured Overnight Financing Rate) futures with a 96/96.12 strike for March expiry, worth US$4.4 million. At the time, the contract was trading around 95.51. This position is a bet that overnight rates will fall back to levels last seen in June. "Massive call buying today, big volume ahead of tomorrow's jobs report," said a floor trader who declined to be named. "The 10-year yield was above 5.3%, then the rally happened."

These moves come as global bond markets grapple with expectations of prolonged tight monetary policy. Rising US Treasury yields have become a magnet for global capital, pressuring emerging market currencies and triggering outflows from domestic bond markets. For Indonesia, the 10-year SUN yield was briefly pressured toward 7%, while the rupiah weakened against the US dollar. If the signals from the options market are correct, and US Treasury yields start to correct, pressure on Indonesian assets could ease. Foreign capital flows could potentially return, especially to government bonds offering attractive yields.

"The options market is often an early indicator of sentiment shifts. When large traders start buying calls on rate-sensitive assets, it's a sign they see the upper limit of yields as near," said a derivatives analyst at a global investment bank, who did not wish to be quoted by name.

However, this signal is not yet conclusive. US jobs data released last Friday remains a determining factor for the direction of Federal Reserve policy. If the data shows the labor market remains tight, expectations of rate hikes could strengthen again and invalidate the bet. Conversely, if the data misses, market participants will become increasingly convinced that the monetary tightening cycle is nearing its end.

Going forward, attention will focus on whether this options flow continues in the coming sessions. If call volume continues to dominate and US Treasury yields genuinely retreat from their peak, then pressure on global bond markets—including Indonesia—could begin to subside. The question is, is this the start of a trend reversal or just a temporary pause before the next storm?