Here’s a market riddle: according to a BoA survey, 93% of Fund managers expect lower Fed funds rates in the next 12 months, the highest conviction over the last 24 years. 60% of them, also expect lower yields over the next year. That should indicate that investors are expecting worsening economic conditions in order for the Fed to act and for the yield curve to adjust lower accordingly. Yet, if you look at the chart below, the short interest on the two biggest ETFs remains at the lowest levels seen in the last 6 years. Even during the episode of August 5th and the following days, the trend shows an unwinding of shorts rather than a build up, suggesting that investors were not expecting a continuation of the movement. Is it blind faith on the soft landing narrative? Or is it just a consequence of the recent past where most short sellers have been burned due to the strength of the bull market? Should we consider this chart a contrarian indicator, a prelude to a downward movement?
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