Pershing Square Capital Management founder Bill Ackman said late Tuesday that his firm has taken out a large short position against the U.S. 30-year Treasury bond.
In a tweet published around 9 p.m. Eastern Time Wednesday, Ackman outlined in a lengthy tweet a litany of factors that he expects will drive yields on the long bond higher, and keep them elevated.
At the core of his view is the expectation that de-globalization, workers’ growing bargaining power, the consequences of the shift away from fossil fuels and other factors will keep inflation at 3% or higher for the foreseeable future.
Ackman offered up a simple calculation: if long-term inflation is 3% instead of 2% and history holds, then the 30-year Treasury yield should rise to 5.5% in the not-too-distant future. Three percentage points of that are compensation for inflation, while half a percentage point is the real baseline interest rate, while the final two percentage points is term premium.
The result should be 30-year yields at 5.5%. By comparison, the 30-year was trading at roughly 4.25%
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on Thursday, on track to settle at their highest level since November, according to FactSet data. Bond yields move inversely to prices, so a sharply higher yield would see bonds held by Ackman’s firm sell off.
What’s more, exploding budget deficits in the U.S. over the next decade should yield a deluge of issuance on the longer end of the curve, since Treasury has recently been financing itself mostly with shorter-term debt, a decision that Ackman blasted as imprudent.
“With $32 trillion of debt and large deficits as far as the eye can see and higher refi rates, an increasing supply of [Treasurys] is assured. When you couple new issuance with QT, it is hard to imagine how the market absorbs such a large increase in supply without materially higher rates,” Ackman said in a tweet.
Ackman added that his firm is “short in size” Treasurys both as a standalone bet, and as a hedge against a selloff in their stock-market holdings.
“That’s why we are short in size the 30-year T — first as a hedge on the impact of higher LT rates on stocks, and second because we believe it is a high probability standalone bet,” he said.
Long-term Treasury yields have been trading lower than short-dated yields for nearly a year, a phenomenon known as an inverted yield curve. Typically, it’s seen as a harbinger of recession. The yield on the six-month Treasury bill
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currently stands at about 5.5%.
Ackman’s tweet followed Fitch Ratings’ decision to downgrade the U.S. government’s credit rating to AA+ from AAA. Fitch’s decision followed a similar move by Standard & Poor’s back in 2011. Now, Moody’s Investors Service is the only major ratings firm that rates U.S. debt AAA.
Plenty of investors and critics have dismissed Fitch’s decision. Berkshire Hathaway chief Warren Buffett told CNBC on Wednesday that his firm has continued buying Treasurys, having recently bought $10 billion in U.S. debt.
Berkshire’s businesses, including insurance, receive a steady influx of cash, which is typically invested in ultra-safe bonds. The company is sitting on a massive pile of cash and Treasury bonds.
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