Bond yields have soared over the past 18 months, as the Federal Reserve has raised interest rates by fully 5.25 percentage points.
And hedge fund star Bill Ackman, chief executive of investment firm Pershing Square, says the carnage isn’t over.
“I believe long-term rates, e.g. 30-year rates, will rise further,” he wrote on X, formerly Twitter. “As such, we remain short bonds through the ownership of swaptions.”
I believe that long-term rates, e.g, 30-year rates, will rise further from here. As such, we remain short bonds through the ownership of swaptions.
— Bill Ackman (@BillAckman) September 22, 2023
The world is a structurally different place than it was. The peace dividend is no more. The long-term deflationary effects of… https://t.co/0YOPaQuOdR
Those are options to enter an interest-rate or other type of swap. The 30-year Treasury recently yielded 4.52%, almost twice the 2.36% of March 7, 2022. (Bond prices and yields move inversely, with prices falling as yields rise.)
“The world is a structurally different place than it was. The peace dividend is no more,” Ackman said, referring to the Ukraine war and other conflicts.
Panoply of Factors for Higher Rates
“The long-term deflationary effects of outsourcing production to China are no more. Workers and unions’ bargaining power continues to rise. Strikes abound, with more likely to come as successful walkouts achieve substantial wage gains.”
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In addition, energy prices are rising rapidly, Ackman noted. And the green-energy transition is extremely expensive.
Furthermore, “our national debt is $33 trillion and rising rapidly. There is no sign of fiscal discipline by either party,” he said.
The government is selling hundreds of billions of bonds weekly, Ackman explained. “China and other foreign nations, historically major buyers of our debt, are now selling.”
Not every cause of higher bond yields is negative. “Our economy is outperforming expectations,” Ackman said. “Major infrastructure spending is beginning to contribute to economic growth and the supply of additional debt.”
Inflation Forecast
As for inflation, it’s not going back to 2% no matter how many times Fed Chairman Jerome Powell reiterates it as his target, Ackman said.
In light of all this, “I have been surprised at how low long-term rates are. I think the best explanation is that bond investors thought of 4% as a high rate of interest because rates hadn’t breached 4% for nearly 15 years,” he said.
“When investors saw the ‘opportunity’ to lock in 4% for 30 years, they grabbed it as a ‘once-in-their-career opportunity,’ but today’s world is very different from the one they have experienced up until now.”
How so?
“The long-term inflation rate, plus the real rate of interest, plus the term premium suggest that 5.5% is an appropriate yield for 30-year Treasuries,” Ackman said.
On the bright side, “I could be wrong,” Ackman said. “Artificial intelligence might save us.”
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