Explaining his rationale, Ackman said he expects a world with ~3% inflation to persist.
“I have been surprised how low US long-term rates have remained in light of 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,” Ackman said. “As a result, I would be very surprised if we don’t find ourselves in a world with persistent ~3% inflation.”
Further, Ackman said long-term Treasuries seem overbought due to a $32 trillion debt burden and large deficits. With higher refi rates and increased T-bond supply from new issuance and QT, absorbing this surplus without considerably higher rates becomes challenging, he explains.
Ackman also said he is puzzled as to why the U.S. Treasury is not utilizing lower long-term rates to finance the government. “This does not look like prudent term management in my opinion,” he commented.
Also, he said you have to consider factors like China’s aim to financially decouple from the U.S., YCC ending in Japan boosting the appeal of Yen bonds compared to T-bonds for the largest foreign holder, and increasing concerns about U.S. governance, fiscal responsibility, and political divisiveness highlighted in Fitch’s recent downgrade.
“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,” he commented. “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.”
Ackman said his firm now has a significant short position on the 30-year T-bond for two reasons: firstly, as a hedge against the potential impact of higher long-term rates on stocks, and secondly, because they consider it a high-probability standalone bet. There are only a few macro investments left that offer reasonably probable asymmetric payoffs, and this is one of them, he added.
“The best hedges are the ones you would invest in anyway even if you didn’t need the hedge,” he concludes. “This fits that bill, and also I think we need the hedge.”
Source: Economy - investing.com
