10-Year Treasuries Exceed 5% For First Time Since 2007, Then Crater On Ackman Short Cover

A milestone of sorts was achieved in the U.S. Treasury market on Monday, as the yield on the 10-year Treasury Note exceeded 5% for the first time in 16 years. This rate, widely recognized on Wall Street as a pivotal gauge of the note’s market’s stability, poked above a key psychological level with traders. However, the fade was later set in motion with a little help from Pershing Square Capital Management founder, Bill Ackman.

Over recent weeks, the prices of long-term Treasury Notes have declined, influenced by apprehensions among investors concerning the Federal Reserve’s efforts to combat inflation and the mounting debt obligations of the U.S. government. Consequently, these concerns have led to an increase in interest rates, which, conversely, move in an opposite direction to bond prices. Notably, 30-year bond rates also surpassed the 5% threshold earlier this month.

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The upsurge in interest rates is intrinsically tied to the Federal Reserve’s signal that it intends to maintain high interest rates well into 2024, as part of its strategy to rein in inflation. Although inflation has tempered somewhat this year, it still exceeds the central bank’s targeted rate of 2%.

Notably, Chairman Jerome Powell conveyed last week that the Federal Reserve intends to proceed with its tightening campaign cautiously. The main factors boil down to how strong growth remains, and the persistently tight labor market that doesn’t seem to quit.

The unemployment rate in the US was at 3.8% in September of 2023, remaining unchanged from the February 2022 high from the previous month and slightly above market expectations of 3.7%. Still, the result consolidated evidence that the labor market remains tight on historical standards, adding leeway for the Federal Reserve to leave borrowing costs at restrictive levels for a prolonged period.

As the chart below elucidates, the unemployment rate still stands near 70-year lows.

Nevertheless, most market participants do not anticipate any reduction in interest rates in the November meeting, with target rate probabilities showing 98.6% expecting a status quo.

Bill Ackman Triggers Bond Rally?

Among U.S. hedge fund managers, Bill Ackman is about as high-profile as it gets. Boasting a net worth of $3.4 billion, Ackman ranks among the world’s wealthiest 1,000 individuals. He is renowned for his role as an activist investor and turnaround artist, channeling his efforts through Pershing Square Capital Management, the hedge fund with $16 billion AUM he founded and continues to run. What Ackman says matters, and often, moves market.

So with 10-year Treasury yields hovering around 5% near the open of U.S. equity markets, this short tweet resonated like a nuclear bomb on trading sentiment. A ferocious bond rally ensued and kept blasting into day’s end, as yields cratered to 4.844%. On this particular day, it was readily apparent that Ackman played Cooler in a market displaying clear signs of froth.

In his justification for Pershing’s bond short cover, Bill Ackman stated, “There is too much risk in the world to remain short bonds at current long-term rates.” In layman’s terms, it’s not a good idea to continue betting against bonds right now because there is a high level of risk associated with that strategy. The implication is that bond prices might rise, and yields might fall in the future, making short positions in bonds potentially very costly.