Renowned hedge fund manager Bill Ackman has expressed surprise at the current state of US long-term rates, highlighting structural changes that could lead to higher levels of long-term inflation.
In a series of tweets, Ackman addressed various factors contributing to this economic landscape, while also revealing his company's significant short position on the 30-year Treasury bonds.
"Surprised at low US long-term rates amid inflationary pressures," Ackman tweeted, acknowledging the significant structural shifts that could pave the way for higher inflation. He mentioned de-globalisation, increased defence costs, ongoing energy transition, expanding entitlements, and growing bargaining power of workers as potential catalysts for inflationary pressures.
In his Twitter thread, Ackman cautioned that the US may soon find itself in a world of persistent 3 percent inflation, above the typical 2 percent target rate. "From a supply-demand perspective, long-term Treasurys (T) also look overbought," he tweeted, expressing concerns over the growing supply of Treasury bonds, currently sitting at $32 trillion, and the resulting impact on interest rates. He pointed to large deficits projected for the foreseeable future and higher refinancing rates as contributing factors.
Ackman questioned the US Treasury's financing strategy, remarking on their apparent lack of inclination to take advantage of the lower long-term rates. He opined that such a move could be a more prudent approach to managing term maturities.
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The hedge fund manager also considered geopolitical factors influencing the demand for US Treasury bonds, particularly China's expressed desire to decouple financially from the US and Japan ending its yield curve control policy. He suggested that these developments could increase the appeal of other foreign bonds compared to the US Treasurys for large foreign holders.
In light of these observations, Ackman proposed a potential scenario for the 30-year Treasury yield, speculating that it could reach 5.5 percent. He based this on a combination of factors, including the projected 3 percent inflation rate, a real rate of 0.5 percent, and a 2 percent term premium. He warned that such a repricing in the bond market could occur quickly, similar to historical instances.
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Amid these concerns, Ackman's hedge fund has taken a significant short position on the 30-year Treasury bonds, which he described as a prudent hedge against the impact of higher long-term rates on the stock market. Additionally, he believes this position presents a high probability standalone investment opportunity, offering attractive asymmetric payoffs.
"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 emphasized.
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