Bill Ackman Stays Short On Bonds, Expects 30-Year Yields To Spike As The World Is Now 'A Structurally Different Place'

Bond yields have been surging of late amid expectations that the Federal Reserve will continue to raise interest rates in the wake of stubbornly elevated inflation and strong economic data. Hedge fund manager Bill Ackman weighed in on surging Treasury yields in a post on X.

What Happened: Ackman, the founder of Pershing Square, said his firm remained short on bonds, especially the 30-year bonds, through the ownership of "swaptions."

A swaption is an option contract that grants its holder the right but not the obligation to enter into a swap contract by paying a premium to the issuer of the contract. A bond swap allows the selling of one debt instrument and using the proceeds to buy another debt instrument, helping to improve returns with a fixed-income portfolio.

Ackman said he expects the long-term rates, especially 30-year bond yields, to rise from current levels.

World A Different Place: "The world is a structurally different place than it was. The peace dividend is no more," Ackman said. A peace dividend refers to reducing defense spending and using the amount for other public purposes.

Outsourcing production to China no longer has long-term deflationary effects, while the bargaining power of workers and unions continue to rise, he said. He also sees the non-filling of the Strategic Petroleum Reserve as misguided and a dangerous mistake, he said. It will now be tough to refill SPR as OPEC and Russia cut oil production.

With the electric vehicle transition still remaining "incalculably expensive," higher gas prices will raise inflation expectations, Ackman said.

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Ackman also flagged the rising national debt, which has quickly risen to $33 trillion. He also slammed a lack of fiscal discipline among members on either side of the aisle and also the presumptive presidential nominees.

"And each debt ceiling is an opportunity for our divided government and its most extreme actors to get media attention, and for our nation to threaten default," he said, adding, "This is not a good way to recruit the many new buyers we need for our bonds."

Economy Resilient: Ackman noted that the economy has been outperforming expectations, with infrastructure spending beginning to contribute to growth. He also disagreed with Fed Chair Jerome Powell’s fixation with the 2% long-term inflation rate. “The long-term inflation rate is not going back to 2%,” he said, reasoning that the 2% target was arbitrarily set after the financial crisis in a world very different from the one we live in now.

“Recession predictions have been pushed out beyond 2024,” he said.

Yield Curve Inversion: How low the long-term rates are is surprising, said Ackman. The fund manager said investors may have thought a 4% interest rate was high, given rates haven't breached this level for 15 years and locked in 4% for 30-year bonds

"But today's world is very different from the one they have experienced up until now," he said.

The long-term inflation rate plus the real rate of interest plus term premium suggests that 5.5% is an appropriate yield for a 30-year Treasury, he added.

"And the technicals could cause yields to go even higher, particularly in the short term. We saw the beginnings of that today," Ackman said.

In early August, Ackman said an increase in the issuance of Treasuries and a reduction in Federal Reserve’s bond holdings have the potential to nudge yields higher. He revealed then he is shorting 30-year Treasury bonds.

The U.S. Treasury 30-Year Bond ETF UTHY ended Thursday’s session down 2.40% at $43.65, according to Benzinga Pro data.

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