A Smart Options Strategy Built to Profit as Treasury Yields Decline

U.S. Treasury yields slipped on Thursday, with the 10-year note dipping below the 4% mark for the first time since April. Meanwhile, stocks fell sharply as renewed concerns over troubled regional bank loans triggered a flight to safety, pushing investors toward government bonds.

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I’m increasingly bullish on the TLT ETF, as I expect Treasury yields to continue declining through the end of the year.

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Market sentiment took a hit after auto parts manufacturer First Brands collapsed financially, sparking fears of broader contagion. The fallout drove regional and smaller bank shares significantly lower declines that many traders view as excessive. As equities reversed earlier gains and tumbled into the close, Treasury yields slid further, reflecting heightened demand for safe-haven assets.

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Traders are becoming increasingly uneasy about the quality of regional bank loan portfolios. Two recent bankruptcies have raised concerns that lending standards may have loosened too much during the last credit cycle. However, I don’t believe these issues signal a systemic threat or a repeat of past banking crises.

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By Thursday’s session, the 10-year Treasury yield briefly hit 3.96%, marking its lowest level since April 7, while the 2-year yield dropped to 3.41%, its weakest since September 8, 2022. (For context, one basis point equals 0.01%, and bond yields move inversely to prices.)

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Adding fuel to the bond rally, Treasury Secretary Scott Bessent has recently advocated for deeper Federal Reserve rate cuts. Following a quarter-point reduction in September, Bessent suggested that a “series of rate cuts” may be warranted. He also criticized Fed Chair Jerome Powell for being too slow to act, arguing that current policy remains overly restrictive. According to his analysis, the “neutral” rate where monetary policy neither stimulates nor restrains growth is between 150 and 175 basis points lower than today’s target range.

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Markets appear to agree. Futures pricing now reflects more than a 75% probability of two additional rate cuts in 2025, signaling broad investor confidence in a continued easing cycle.

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This backdrop of monetary support and risk aversion could keep yields trending downward in the near term. Yet, as with any trade, defining risk is crucial in case market timing proves too early.

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The Trade Setup: Buying a TLT Call Spread

To position for falling yields and thus rising bond prices I’m implementing a call spread strategy on the TLT ETF:

• Bought the Dec. 19 $91 TLT call for $1.95
• Sold the Dec. 19 $95 TLT call for $0.75

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At the time of execution, TLT was trading just above $91. The position results in a net debit of $1.20 (or $120 per spread). For the trade to break even at expiration, TLT must rise above $92.20.

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This setup allows participation in potential upside if bond prices continue to climb, while limiting downside exposure should yields unexpectedly rebound.

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With yields hitting multi-month lows and expectations building for further Fed easing, the risk-reward balance for Treasurys appears increasingly favorable. Although volatility could remain elevated in the short term, it may also open opportunities for investors who believe that the path of least resistance for rates is still lower.

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In short, as bond market dynamics shift and economic uncertainty persists, Treasurys remain one of the few assets offering both stability and potential upside. That makes TLT an attractive vehicle for investors seeking to capitalize on declining yields while maintaining a defined risk profile.

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