The GFC (great financial crisis) shaped and reshaped the worldview of any market-watcher that lived through it.  The 70s/80s were increasingly seen as a one-off aberration against a baseline of generally low, flat long-term rates in the 1-3% range.  Due to that paradigm, the post-covid volatility in inflation and rates has been accepted only slowly and painfully.  The paradigm continues informing the belief that 4.3% in 10yr yields is too damn high and buyers surely have to be lining up.  Unfortunately, when too many investors are on one side of the trade, the market often moves in the opposite direction.

At least that's one of the old sayings.  Other variations include things like "the market will do what it must in order to prove the maximum number of traders wrong."  But a closer look at 20230817 open.png

It's true that their net long position is the highest it's been in a long time, but not much longer than it was at the end of 2018.  It was also the longest in years in the middle of 2015 and the market did nothing to punish the imbalance.  In fact, bonds rallied to all-time low territory by the following summer.  

There are plenty of other traders who are short bonds.  Interestingly enough, leveraged accounts are net short 1,287m contracts.  That goes a long way toward offsetting the net long among money managers of 1.303m contracts.  

Long story short (no pun intended), glib witticisms about what the market "always does" are never as simple as they sound.  Bonds are adjusting to a new normal with shorter-term yields more anchored by Fed Funds Rate expectations (thus putting pressure on longer-term yields to un-invert the curve).  Additional pressure comes courtesy of a particularly heavy imbalance of Treasury issuance versus revenues as well as foreign governments selling Treasuries to prop up their devalued currencies. 

As has been and continues to be the case, short term yields need to fall significantly before long term yields get significant relief.  That won't happen until the Fed signals a willingness to cut and that won't happen until inflation and econ data do a lot more than they have to show the impact of the Fed's policy tightening.  For inflation, that could merely mean repeating the recent 0.2% m/m core performance, but for econ data, things are going to have to start looking a lot more contractionary.

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