For weeks the market for American government debt has looked like a country in retreat. Prices fall, yields rise, and every auction day comes like a summons that nobody wants to answer. On Wednesday, October 7, the 10-year Treasury yield touched 5.365 percent, its highest level since April 2002, according to CNBC. The 30-year bond traded just below a 24-year high. A week earlier rews recorded the 10-year at 5.25 percent, then the highest since 2007. The ceiling kept rising.

Into this retreat stepped a small group of people who decided to bet that it was ending.

The ticket

As Oliver Renick reported for CNBC, Wednesday’s trading in options on the iShares 20+ Year Treasury Bond ETF, known by its ticker TLT, leaned hard toward calls, which are bets that the fund will rise. Volume ran 50 percent above its 30-day average, according to data compiled from Cboe LiveVol and SpotGamma. Traders bought almost 370,000 calls and fewer than 100,000 puts, and they sold more puts than they bought. Nine of the ten most-traded contracts were calls. Some traders were selling calls too, but most of the volume and premium sat with the bulls. A rising TLT means falling rates, so the message was that betting on still-higher yields no longer looked worth the risk.

The most popular trade in the October 30 monthly expiry tells the story best. It was a purchase of the 82-strike call, a contract priced at 10 cents that changed hands about 16,000 times that day. For it to pay, long bonds would have to win back everything they have lost since September 22. That stretch was the worst part of this year’s sell-off: TLT fell 6 percent and the 30-year yield moved past 5.6 percent.

A ten-cent option is the market’s version of a lottery ticket. It costs almost nothing and usually expires worthless. It also shows what someone is willing to imagine.

Most of the buying came from one aggressive trader at 10:01 a.m. Eastern time. This buyer spent at least $250,000 on 82-strike calls expiring October 16 and October 30, and on 5,000 of the 80-strike calls expiring October 30. In dollar terms the order was modest. It was still the largest purchase of any contract in the month-end expiry, and it arrived shortly before the 10-year auction.

The auction

Then the Treasury sold its paper and buyers came in force. The government auctioned $39 billion of 10-year notes at 5.30 percent, below the 5.317 percent the market had priced just before the sale, CNBC reported. That was the highest auction yield in more than two decades. The bid-to-cover ratio was 2.77, compared with an average of 2.51 over the past year. Indirect bidders, a category that includes foreign central banks, took 80.3 percent. Primary dealers, the banks that must absorb whatever nobody else wants, were left with 2.5 percent, against an average of 9.4. A low dealer share is the clearest sign that outside buyers really wanted the notes.

“Tens had a bullet bid today – auction demand has been very strong,” Jim Perry, founder and chief investment officer of Perry International Capital Partners, said in a text message. “Demand is strong. It was `fill my market order at market prices because I want them.’”

After the auction the 10-year yield eased to 5.276 percent. John Luke Tyner of Aptus Capital told CNBC the results were “much stronger than feared and better than the last few notably bad auctions.”

The lesson here is an old one. A sovereign borrower that has to pay enough eventually finds lenders. Whether the borrower should be pleased about that price is a separate question.

The second test

On Thursday the question moved to the long end. The Treasury was due to sell $22 billion of 30-year bonds at 1 p.m. Eastern time, in a reopening of an existing issue. In the morning the 30-year yield was down more than a basis point at 5.643 percent, and the 2-year had risen to 4.802 percent. September’s 30-year sale cleared at 5.308 percent. In August, the Committee for a Responsible Federal Budget noted, a 30-year auction produced the highest yield in 25 years.

The central bank gives the bulls little cover. Minutes of the Federal Reserve’s last meeting, released Wednesday, showed officials expecting to raise rates further, without saying when. On Thursday Fed governor Christopher Waller said more hikes were needed, according to CNBC. Investors expect the Fed to hold at its October 28 meeting and raise rates on December 9. All of this sits behind a war with Iran that has lifted oil and sunk bonds. People buying long-bond calls are betting against that whole combination.

The utilities

The TLT flows came after a shift in another rate-sensitive corner. For a month, options trading in the utilities ETF, XLU, had been dominated by persistent put-buying, the posture of people protecting themselves. On Friday that changed: one trader sold $1 million of puts, betting the sector’s slide would ease or reverse. Utilities have gained about 3 percent since then. On Wednesday call-selling was prominent in XLU, but there was very little put-buying.

Even the man who described the bullet bid was not offering his money to bonds.

“Yields may be topping out. But I would rather own stocks. If yields fall, stocks will outperform bonds.”

In other words, the people calling the bottom do not necessarily want to own the thing at the bottom. They want what might follow from it. A ten-cent call fits that view: a small amount of money placed on a recovery that, for now, exists only in the strike price. Its holders will find out by October 30.