‘Too much risk in the world’: Bill Ackman's bond bet reversal roils treasury markets

In August 2023, Bill Ackman declared his skepticism about the state of the U.S. economy and the U.S. Treasury market

Bill Ackman has made waves in the financial world yet again with his changing perspective on long-term US Treasurys. Three months after Ackman said that he was bearish on 30-year Treasurys, the billionaire hedge fund manager revealed on October 23 that he covered his short bet, saying “there is too much risk in the world to remain short bonds at current long-term rates."

Ackman's about-face sparks treasury bond turmoil

Since his X post, the Treasury markets went on a trajectory in the opposite direction with market experts speculating that his posts have likely triggered the fall in 30-year bond yields. Following Ackman's three succinct tweets, totaling 31 words, the 30-year Treasury yield fell 13 basis points to 4.96 percent on October 24.

There is too much risk in the world to remain short bonds at current long-term rates.
— Bill Ackman (@BillAckman) October 23, 2023

This small percentage fall can mean billions of dollars in consequences, especially for the US government as it refinances its debt at higher interest rates and, therefore, dedicating more of its budget toward interest payments.

In August 2023, Ackman, the CEO of the sizable hedge fund Pershing Square, declared his skepticism about the state of the U.S. economy and the U.S. Treasury market. Coming across as a bond vigilante, Ackman expressed surprise at low US long-term rates amid inflationary pressures. "From a supply-demand perspective, long-term Treasurys (T) also look overbought," he wrote, expressing concerns over the growing supply of Treasury bonds, and the resulting impact on interest rates.

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Ackman’s bond short: A success

The renowned fund manager had cited “structural changes that are likely to lead to higher levels of long-term inflation including de-globalization, higher defense costs, the energy transition, growing entitlements, and the greater bargaining power of workers", among the reasons for his bearish view.

At the time, he had proposed a potential scenario for the 30-year Treasury yield, speculating that it could reach 5.5 percent. This turned out to be true as the 30-year Treasury yield touched 5.11 percent on October 19, 2023.

Note that bond price and bond yield are inversely related. As the price of a bond goes up, the yield decreases. This is because the coupon rate of the bond remains fixed, so the price in secondary markets often fluctuates to align with prevailing market rates. The 30-year treasury yield has risen around 80 basis points since the end of August, making Ackman’s bet profitable.

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Why Ackman’s stance on bonds shifted?

Earlier this week, just as 10-year Treasury bonds reached their lowest point since 2007, Ackman announced that his firm covered their short on bonds. In an X post, he cited "too much risk in the world" as a factor for his reversal decision, which indeed seems valid in a global context marred by conflicts, most notably the Israel-Hamas war.

He further stated that he covered the short because of concern about the economy. “The economy is slowing faster than recent data suggests,” he wrote. The billionaire also hinted at the beginning of a decrease in inflation.

Now, market observers are left speculating about the extent of Ackman's profits from this remarkable bet.

Also Read | Bond market has a favourable demand-supply balance ahead

U.S. bond prices on a decline

It is important to note that bond prices have continued to decline, and yields have increased as the US economy and labor market consistently outperformed expectations. The economy's robust performance has been a contributing factor to keeping yields elevated.

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