Hedge funds skipped the April dip and loaded up on bond shorts. A massive squeeze could be brewing, with yields at risk of collapsing as both the trade war and debt crisis turn deflationary.

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April came with blood on the screen. Stocks sold off, yields surged, and the Fed kept its poker face. Retail panicked. But one group didn’t buy the dip: hedge funds. They saw the trap. Or at least they thought they did.

They didn’t touch equities.

Instead, they went after bonds with a vengeance.

The logic? Crystal clear at the time: Sticky inflation. No Fed cuts. Soft landing at best, stagflation at worst. So they piled into leveraged short positions on Treasuries, betting yields had nowhere to go but up.

The market backed them for a while. CPI stayed hot. Oil perked up. Growth looked decent. Every whisper from the Fed had that same hawkish undertone. And the hedge fund crowd? They doubled down. Then tripled. Leveraged bond shorts hit levels not seen in years. They were all in.

But markets don’t follow logic.

They follow pain.

And here’s where the tide turns.

The narrative just cracked.

Trade war rhetoric is back. Not tweets. Policy. Tariffs. Export controls. Strategic decoupling. You name it. This isn’t about inflation anymore—it’s about a system-wide economic chill. Then layer on the debt ceiling drama, a Congress too broken to function, and suddenly the risk isn’t “too much inflation.”

It’s not enough demand.

The signs are everywhere if you know where to look:

Payrolls softening.

ISM manufacturing rolling over.

Consumer credit tightening.

Shipping rates dropping.

The market smells deflation. And you can already feel it in the air—the shift from fighting inflation to bracing for contraction.

Yet hedge funds are still sitting on one of the most aggressively short bond positions in over a decade. If yields start to fall—really fall—there’s no way out except up.

That’s the setup. The trap’s already sprung.

Every basis point lower will rip through those short books. Margin calls. Forced buying. Unwinding at scale. We’re talking about a potential short squeeze that makes 2019 look like a warm-up act.

And the kicker? If yields drop, equities might not rally like they used to. Not when deflation, not inflation, becomes the fear.

This time, bonds lead.

And they lead fast.

Bottom line?

When everyone’s leaning one way, the exit door gets smaller. Hedge funds thought they had the trade of the year. Now they’re cornered. And bonds might be the breakout star of the next macro shock.

Watch yields. Watch positioning. And don’t blink.