Inflation is unlikely to return to the Fed’s 2% target anytime soon, according to Bill Ackman—and the legendary investor is getting ready to cash in on what he says is an imminent repricing of long-term U.S. bonds as a result.
In a Wednesday evening post on Twitter, now known as X, Ackman—who founded Pershing Square Capital Management in 2004 and also serves as its CEO—said he was preparing for a world where U.S. inflation lingered at around 3%.
He noted being “surprised” by the persistently low long-term U.S. rates despite sticky inflation, deglobalization, the energy transition, and increased worker bargaining power. He revealed being short on long-term treasuries due to concerns about the impact of persistently high inflation on debt supply, equities, and bond prices.
“If long-term inflation is 3% instead of 2% and history holds, then we could see the 30-year T yield = 3% + 0.5% (the real rate) + 2% (term premium), or 5.5%, and it can happen soon,” he said. “There are many times in history where the bond market reprices the long end of the curve in a matter of weeks, and this seems like one of those times.”
The current yield on a 30-year U.S. Treasury is approximately 4.3%, and it increased after Fitch downgraded the U.S. triple-A credit rating on Tuesday.
Rising Treasury yields push debt prices down, and they may rise further if the Federal Reserve tightens monetary policy due to inflation hovering above the 2% target.
Although U.S. inflation cooled in June, it still remains at 3% for the 12th consecutive month.
Ackman added on Wednesday that from a supply and demand perspective, long-term Treasuries seemed to be overbought, which could put additional downward pressure on the price of bonds.
“With $32 trillion of debt and large deficits as far as the eye can see and higher [refinance] rates, an increasing supply of [Treasuries] is assured,” Ackman said. “When you couple new issuance with [quantitative tightening], it is hard to imagine how the market absorbs such a large increase in supply without materially higher rates.”
The U.S. Treasury is expected to issue more than $1 trillion in T-bills by the end of 2023, as the government looks to build its cash reserves following the government’s last-minute deal to raise the debt ceiling.
Ackman said Wednesday that because of his outlook for the economy and markets, Perishing Square was “short in size” on 30-year U.S. Treasury bills.
The firm was doing this “first as a hedge on the impact of higher [long-term] rates on stocks, and second because we believe it is a high probability standalone bet,” the billionaire hedge funder explained.
“There are few macro investments that still offer reasonably probable asymmetric payoffs, and this is one of them,” he added. “We implement these hedges by purchasing options rather than shorting bonds outright. This makes it easier to sleep at night as it makes your downside finite. Our ‘sleep-at-night test’ is a critical risk management tool.”