Renowned hedge fund manager Bill Ackman has caused a major stir by reversing his outlook on long-term US bonds. Just three months ago, he expressed a bearish sentiment towards 30-year US bonds. However, on October 23, Ackman announced that he had closed his short positions on these bonds. He attributed this change to the increased global risk, emphasizing that maintaining short positions in bonds was no longer prudent.
Bill Ackman’s Surprising Reversal on Long-Term US Bonds
In response to Ackman’s tweets, the yield on 30-year American bonds dropped by 13 basis points, reaching 4.96 percent on October 24. This decline holds significant implications for the bond market, especially for the US government. The US government relies on issuing bonds to manage its debt, and a drop in bond yields forces it to maintain higher interest rates, placing a heavier financial burden on the government.
Factors Behind Ackman’s Bearish View on 30-Year Bonds
Bill Ackman, serving as the CEO of Pershing Square, had expressed concerns about the state of the American economy and the bond market back in August. He was surprised by the persistently low long-term rates despite inflationary pressure, stating that, “Looked at from a supply-demand perspective, long-term US bonds appear to be overbought.” He also highlighted concerns regarding the increasing supply of bonds and its potential impact on interest rates.
Bill Ackman’s Concerns About the American Economy
Ackman’s report suggested that long-term inflation might remain high due to structural changes and shifts in globalization trends. Additionally, increased defense spending was anticipated, potentially strengthening the bargaining power of workers. These factors underpinned his bearish viewpoint, and he had predicted that the yield on 30-year bonds would reach 5.5 percent. This prediction materialized when the yield reached 5.11 percent on October 19. In the US, government bonds are commonly referred to as Treasuries.
It’s crucial to understand the inverse relationship between bond price and yield, where a rising bond price corresponds to a decreasing yield, and vice versa. The yield on 30-year bonds has surged by nearly 80 basis points since August. Earlier in the week, the 10-year bond yield reached its lowest level since 2007. Ackman subsequently announced that his firm had covered its short bond positions.
Ackman’s Insight and Recent Developments
Ackman’s foresight became evident, especially following the conflict between Israel and Hamas. He noted that the economy was slowing down faster than expected and expressed optimism about a reduction in inflation.
Notably, bond prices in the US have been on a continuous decline, leading to increased yields. The better-than-expected performance of the US economy and labor market has played a role in maintaining these higher yield levels.