Bill Ackman is the founder and CEO of Pershing Square Capital Management.
The bottom line from his note is that:
- we are short in size the 30-year T
Bolding mine.
Ackman on the Twitter, saying he is surprised at how low longer-term US rates have stayed citing 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.
As a result, I would be very surprised if we don’t find ourselves in a world with persistent ~3% inflation
Ackman adds also that long-term Treasurys (T) look overbought, from a supply/demand perspective.
- $32 trillion of debt
- large deficits as far as the eye can see
- higher refi rates
Thus:
- an increasing supply of T 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 doesn't stop there:
- Then consider China’s (and other countries’) desire to decouple financially from the US,
- YCC ending in Japan increasing the relative appeal of Yen bonds vs. T for the largest foreign owner of T,
- and growing concerns about US governance, fiscal responsibility, and political divisiveness recently referenced in Fitch’s downgrade.
Mulls in high inflation:
- So 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.
- 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.
- 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.
