Wrong-Way Bets on Inflation Exposed Ahead of Fed Rate Decision

Professional speculators with billions in bearish trades on the line endured a rough ride after Tuesday’s report on US consumer prices brought the latest sign that the Federal Reserve is making progress in its battle against inflation.

Hedge funds that had amassed the biggest short position against Treasuries since March 2020 were caught off-guard when data showing prices rose at the slowest pace in more than a year sparked a rally across the curve. The two-year rate sank more than 15 basis points.

Funds that kept equity exposure at historically low levels or outright bet against the market with short positions fared slightly better, though not without some drama. The S&P 500 spiked nearly 3% in the report’s aftermath before giving back most of the gains as attention turned to Wednesday’s Fed rate decision.

“Investors have been reluctant up until today’s US CPI release to abandon short positions in rates, this might change now that we have had two consecutive months of significant negative surprises in US core CPI,” said JPMorgan Chase & Co. strategist Nikolaos Panigirtzoglou.

The extreme positioning threatens to undo gains for funds that have ridden the inflation trade all year should the Fed turn less hawkish after its final meeting of the year.