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)...

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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)...

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

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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)...

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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).

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