08/04/2023
Bill Ackman is surprised by the low US long-term interest rates despite potential factors that could lead to higher long-term inflation. These factors include de-globalization, higher defense costs, the energy transition, growing entitlements, and increased bargaining power of workers. They predict that persistent inflation of around 3% is likely.
The supply/demand perspective for long-term Treasurys is also considered overbought due to the significant amount of debt and ongoing deficits, leading to an increasing supply of Treasurys. Ackman finds it puzzling that the US Treasury hasn't taken advantage of lower long-term rates for financing the government.
Additionally, factors in China's desire to decouple financially from the US, the end of yield curve control (YCC) in Japan, which increases the appeal of Yen bonds compared to US Treasurys for the largest foreign owner of Treasurys. Concerns about US governance, fiscal responsibility, and political divisiveness have also been cited in Fitch's downgrade.
Based on the above analysis, Ackman believes that the 30-year Treasury yield could potentially rise to 5.5%, and they have a short position on the 30-year Treasury as a hedge against higher long-term rates impacting stocks. They consider this a high probability standalone bet with attractive asymmetric payoffs.
