Hedge Funds Are Record Short Bonds As Market Cuts Dovish Fed Bets

2023 started with a buying-panic in bonds (approaching their best start to a year in over 30 years at one point) as confidence grew about The Fed’s terminal rate (not as high as some feared) and a soft landing (growth cooling and inflation slowing)…

Source: Bloomberg

But, as the last week’s surge in positive macro data (driven largely by better than expected labor market prints), we have seen bonds sold (and stocks bought)…

And hedge funds have piled in, building, as Bloomberg reports, the biggest bearish bet on bond futures on record…

An aggregate measure of net-short non-commercial positions across all Treasuries maturities has hit 2.4 million contracts, according to the latest data from the Commodity Futures Trading Commission as of Jan. 24. The positions cover a multitude of investment strategies from outright bets to yield-curve wagers to relative trades to hedges, but the overall direction clashes with the narrative that a peak in rate hikes is near and a US recession will push investors back into bonds.

“The surge of bets against Treasuries may be driven both by the risk for a hawkish Federal Reserve meeting this week and also the longer-term concern that a soft landing would mean higher yields,” said Chamath De Silva, a senior portfolio manager for Sydney-based BetaShares Holdings.

“If the US economy can thrive in the face of the tightest hiking in recent history then that should mean we end up with a higher neutral rate and and a re-steepening of the yield curve.”

Perhaps even more notably, short-term interest-rate (STIR) markets are starting to price out a dovish Fed in the second half of 2023 (since 1/19 H2 2023 cut expectations have dropped from 54bps to 40bps)…

As the chart shows, the terminal rate remains relatively ‘well-behaved’ below 5.00% (59bps of hikes priced in from here), but expectations for a ‘pivot’ from The Fed are starting to fade (even as stocks squeeze higher on the same hope), more in favor of a pause (as The Fed’s dots and jawboning signal).