Adjust oven rack to lower-middle position and heat oven to 400 degrees. Generously spray inside of Dutch oven with vegetable oil spray. Add onions, butter, and 1 tsp salt.
Cover and bake until onions wilt slightly and look moist, about 1 hour.
Stir onions thoroughly, scraping bottom and sides of pot. Partially cover pot and continue to cook in oven until onions are very soft and golden brown, 1 1/2 to 1 3/4 hours longer, stirring onions thoroughly after 1 hour.
Carefully remove pot from oven and place over medium-high heat. Using oven mitts to handle pot, continue to cook onions, stirring and scraping pot often, until liquid evaporates, onions brown, and bottom of pot is coated with dark crust, 20 to 25 minutes. If onions begin to brown too quickly, reduce heat to medium. Also, be sure to scrape any browned bits that collect on the spoon back into the onions.
Stir in 1/4 cup water, thoroughly scraping up browned crust. Continue to cook until water evaporates and pot bottom has formed another dark crust, 6-8 minutes. Repeat deglazing 2 or 3 more times, until onions are a very dark brown.
Stir in sherry and cook until evaporated, about 5 minutes. Stir in chicken broth, beef broth, 2 cups more water, thyme bundle, bay leaf, and 1/2 tsp salt, scraping up any remaining brown bits. Bring to simmer, cover, and cook for 30 minutes. Discard thyme bundle and bay leaf and season with salt and pepper to taste.
Soup can be refrigerated for up to 3 days, return to simmer before proceeding.