The Treasury Market's Big Recession Trade May Keep Risk Appetite Surging

Long-dated Treasury yields are already below the Fed's overnight benchmark range -- currently 3.75% to 4%.

Futures market also suggests a a few more rate hikes, then cuts, with the cycle ending next year with the rate near 5%.

Meanwhile, with the more friendly Fed getting back, junk bonds were drawing their beggest passive inflows on records.

Equity exposure among quants has turned positive and that of active fund managers is back near long-term averages.

High-yield corporate bonds had their best 2-month inflows on record in October and November, attracting $13.6 billion in exchange-traded fund inflows, according to Bloomberg. Exchange-traded funds that track growth stocks are taking in the most cash, as opposed to funds that buy value stocks that have benefited from high inflation.

Big-money allocators have increased their overall risk exposure by boosting their equity holdings close to their long-term averages, according to a poll by the National Association of Active Investment Managers (NAAIM).

"The market moves much faster than the Fed," Kumar of Seven Investment said. "Every time the market fails to believe them, financial conditions ease, cementing the Fed's bias toward higher rates."