Hedge Fund Guru Bill Ackman Bets Against US Treasuries, Expects 30-Year Yields To Surge To 5.5%

Billionaire hedge fund manager Bill Ackman is shorting long-term U.S. Treasuries, specifically targeting the 30-year maturity. His prediction: yields could skyrocket to 5.5%.

But why is he making such a high-stakes bet?

In a tweet published overnight, the CEO of Pershing Square Capital Management warned that U.S. long-term interest rates are still low given several structural changes in the economy that are likely to trigger higher long-term inflation.

“I would be very surprised if we don't find ourselves in a world with persistent 3% inflation,” Ackman said.

Higher Debt, Deficits Warrant Increase In The Supply Of Bonds

Ackman said he expects an increase in the issuance of Treasuries as a result of the U.S. government’s massive $32-trillion debt and continuous large deficits. This comes at a time when the Federal Reserve is reducing its bond holdings through quantitative tightening (QT).

“It is hard to imagine how the market absorbs such a large increase in supply without materially higher rates,” he said.

Chart: 30-Year Treasury Yields Have Spiked Well Above 4%

30-Year Yields Could Soon Rise To 5.5%

According to Ackman, Japan’s exit from yield curve control (YCC), as well as mounting concerns about US governance, fiscal responsibility and political polarization underlined by Fitch’s downgrade of the country’s credit, may all lead to higher long-term interest rates.

A stabilization in long-term inflation to 3%, rather than the traditional 2%, may put significant upward pressure on 30-year rates, which might soon reach 5.5%.

Ackman warns that quick increases in bond yields are not uncommon, and this appears to be one of those episodes.

“The best hedges are the ones you would invest in anyway even if you didn't need the hedge. This fits that bill, and also I think we need the hedge,” Ackman wrote.

ETFs Using Short Strategies Against Treasuries

There are several exchange traded funds that allow investors to take short positions on U.S. Treasury securities:

• Direxion Daily 20-Year Treasury Bear 3X TMW: A leveraged ETF aiming to provide three times the inverse daily performance of the NYSE 20+ Year Treasury Index.
• ProShares Short 20+ Year Treasury TBF: Seeks to provide the inverse performance of the ICE U.S. Treasury 20+ Year Bond Index.
• ProShares UltraPro Short 20+ Year Treasury TTT: Offers three times the daily inverse exposure to the performance of the ICE U.S. Treasury 20+ Year Bond Index.
• ProShares UltraShort 20+ Year Treasury TBT: Aims to deliver twice the inverse daily performance of the ICE U.S. Treasury 20+ Year Bond Index.
• ProShares Short 7-10 Year Treasury TBX: Provides the opposite daily performance of the ICE U.S. Treasury 7-10 Year Bond Index.
• Direxion Daily 10-YR Treasury Bear 3X SHRS TYO: A leveraged ETF designed to achieve three times the inverse daily return of the NYSE 10-Year U.S. Treasury Note Futures Index.

Now read: US Credit Rating Cut Triggers Surge In Treasury Yields: 7 ETFs Experience Wild Swings