Hawkish Fed bond bulls shred 2023 playbook

Bond investors are having to regroup after last week's Federal Reserve meeting dealt a crippling blow to a strategy that many on Wall Street had banked on at the start of the year.Back then, wagering that short-term yields would decline relative to longer-term ones seemed a sure bet with the Fed expected to finally stop its aggressive hiking cycle and pivot to cuts later in the year. Now, after the central bank upped its projection for interest rates this year by a half-point, the once-popular yield-curve steepening strategy is being abandoned.

"The steepener is a challenging trade," said Michael de Pass, global head of linear rates at Citadel Securities, adding it's not the time to put on this trade. "It's expensive and crowded." That hawkish outlook prompted traders to all but price out rate cuts later this year, with short-term yields rising faster than longer tenors and further upending the steepening trade.