The US economy continues to hang in there just fine but inflationary data on many fronts continues to fall and the bond market is pricing in just a 10% probability of a Fed rate hike come September. So, with the Fed near done with rate hikes and Fed chair Powell warming up for his big speech next week in Jackson Hole (“our work here is done”), one would think that the bond futures market would have less gloom…not so.
Positioning at the very front end of the UST curve is way off-sides. The last time short interest was this high on 2y UST was…never. The last time I saw positioning this far off-sides was when the world was short the SP500 last October 2022 (FYI equity markets are up about +25% from that occurrence). To put it simply, the bond futures market is not ready for what I think will happen next week at Jackson Hole: a Fed declaration that the war against 2021 COVID related inflation is over.
When so many have bet that 2Y UST yields are headed higher the opposite often/usually/always happens. Economy slower, yields lower.
Risk assets will LOVE short, dated yields going lower. Not like, LOVE. The time to be short 2Y UST was when 2Y UST rates were zero, not 5%. Positioning not consistent with a Fed about to go into extended “pause mode”.
Source: EISI as of August 14, 2023
Richard Barrett
Chief Investment Officer
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