One of Wall Street’s most prominent bond bears has chosen to pocket his profits and step back, anticipating a potential reversal in Treasury yields after their steep climb that sent shockwaves through global markets.
Bill Ackman, the brain behind Pershing Square, announced on Monday that he has withdrawn his wager against 30-year Treasury bonds. He took to X, the social media platform that was once known as Twitter, to express his thoughts. In a string of posts, he stated that the world is teeming with too much risk to maintain a short position on bonds given the current long-term rates.
In a succinct early Monday post, Ackman announced:
We covered our bond short.
— Bill Ackman (@BillAckman) October 23, 2023
He further elaborated that the “economy is slowing faster than recent data suggests,” a realization that played a pivotal role in his decision making.
The economy is slowing faster than recent data suggests.
— Bill Ackman (@BillAckman) October 23, 2023
In general, an economic slowdown often leads to a rally in bonds because it usually prompts central banks to lower interest rates to stimulate the economy. Lower interest rates increase the value of existing bonds that offer fixed interest payments, making them more attractive to investors seeking reliable returns amidst uncertain economic conditions.
Ackman had previously disclosed in early August that his firm was banking on the decline of 30-year Treasury bonds. This stance was influenced by predictions of skyrocketing U.S. budget deficits and the belief that several dynamics could sustain inflation rates significantly above the Federal Reserve’s 2% benchmark. The hedge fund mogul even suggested that he wouldn’t be taken aback if the 30-year yield soared to 5.5% in the foreseeable future.
In a discussion at CNBC’s Delivering Alpha conference towards the end of last month, Ackman predicted that the yield on the 10-year note could swiftly surpass 5%. This forecast was proven accurate when the yield briefly exceeded 5% this Monday for the first time since 2007.
Hedge funds have swiftly amassed short positions in U.S. Treasury futures throughout this year, engaging in what’s known as the ‘basis trade’. This leveraged arbitrage strategy capitalizes on price discrepancies between cash bonds and futures. The idea behind the trade is to profit from the convergence of the bond’s price and the futures contract’s price as they approach delivery. This strategy can be profitable if the price difference between the cash bond and the futures contract narrows or widens beyond the cost of carry (interest costs minus income from the bond) for the period of the trade.
A multitude of factors have fueled the recent exceptional bond sell-off. These include concerns about the fiscal stability of the U.S. government, an upsurge in debt issuance from the Treasury, the Federal Reserve’s continuing ‘quantitative tightening’ initiative, robust economic growth surpassing expectations, and a revision of the interest rate outlook.
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