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Continued Selloff in Long-Term U.S. Treasury Securities

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The sharp decline in long-term U.S. Treasury securities shows no signs of stopping. One contributing factor to this trend is the bearish remarks made by Bill Ackman, the head of Pershing Square Capital Management.

In a recent tweet, Ackman revealed that he is shorting long-term U.S. Treasuries. He predicts that the yields on 30-year bonds, currently at 4.30%, could skyrocket to 5.5%. Ackman’s track record in interest-rate bets has been impressive, with profits amounting to approximately $5 billion in recent years.

Ackman expressed his surprise at the persistently low U.S. bond yields, considering the various structural changes that are likely to drive long-term inflation. These changes include factors such as de-globalization, higher defense costs, the energy transition, growing entitlements, and the increasing bargaining power of workers.

Over the past few days, the yield on the 30-year Treasury bond has risen by more than a quarter of a percentage point, which is a significant shift in this market. It is now approaching the high of 4.39% reached in October of last year. Additionally, the yield on 10-year Treasury debt has climbed from 3.96% on Monday to 4.17%.

In this scenario, when bond prices fall, yields rise. On Thursday, the price of 30-year bonds experienced a considerable intraday drop of approximately 2%. This downward trend was also observed in corporate bonds, mortgage securities, and municipal bonds.

The widely traded iShares 20-year Treasury Bond exchange-traded fund (ticker: TLT) faced a decline of 2.2%, reaching $94.96. Despite this downtrend, it remains approximately 3% above its lowest point in October.

Key Takeaways

  • The selloff of long-term U.S. Treasury securities continues.
  • Bill Ackman, head of Pershing Square Capital Management, has expressed bearish sentiments.
  • He is shorting long-term U.S. Treasuries and predicts a rise in 30-year bond yields.
  • The yield on the 30-year Treasury bond is nearing its previous high of 4.39%.
  • Yields rise as bond prices fall, affecting various types of bonds.
  • The iShares 20-year Treasury Bond ETF (TLT) has also experienced a decline.

Ackman’s Market Analysis and Investment Strategy

Bill Ackman, the renowned investor and hedge fund manager, has recently expressed his concerns about a potential surge in long-term inflation rates. In a tweet, he shared his insight, stating that if long-term inflation reaches 3% instead of the current 2%, the 30-year Treasury yield could rise significantly.

According to Ackman, based on historical data, this could lead to a 30-year Treasury yield of 5.5%. He emphasized that the bond market has repriced the long end of the curve in a matter of weeks several times throughout history, and he believes that this might be one of those instances. This is why Ackman has taken a short position on the 30-year Treasury as both a hedge against the impact of higher rates on stocks and as a standalone bet with a high probability of success.

Ackman primarily manages his investments through Pershing Square Holdings, a European-listed closed-end fund that has amassed approximately $12 billion in net assets. This investment vehicle is also traded in the U.S., identified by the ticker PSHZF.

At present, Pershing Square Holdings trades at around $38 per share, which represents a significant discount compared to its net asset value of nearly $60. The fund maintains a concentrated equity portfolio with holdings in notable companies like Restaurant Brands International (QSR), Lowe’s (LOW), and Alphabet (GOOG).

In his annual letter to shareholders, Ackman highlighted the success of Pershing Square’s rate bets over recent years, yielding profits of approximately $5 billion since 2020. One of their most profitable initiatives was launched in 2020, taking advantage of the Fed’s implementation of higher rates starting in early 2022.

The Treasury bond market has also been affected by recent events, such as Fitch’s decision to downgrade the credit rating of the U.S. government from triple-A to double-A plus. Furthermore, the heightened bond issuance by the Treasury following the resolution of the political standoff over the debt ceiling has added additional pressure.

In conclusion, Ackman’s analysis underscores the potential impact of rising long-term inflation rates and the subsequent effect on Treasury yields. His investment approach, centered around shorting the 30-year Treasury, is supported by historical market behavior and his confidence in its success. As investors navigate these uncertain times, Ackman’s expertise and track record serve as a valuable resource for informed decision-making.

Deterioration in Standards of Governance Negatively Impacting Fiscal Management

Fitch Ratings has observed a concerning trend of declining standards of governance over the past two decades, particularly in relation to fiscal and debt matters. Despite the temporary relief provided by the June bipartisan agreement to suspend the debt limit until January 2025, Fitch emphasizes that this measure does not rectify the ongoing issues.

The repeated political standoffs surrounding the debt limit and the reliance on last-minute resolutions have significantly undermined confidence in fiscal management. This erosion of trust raises concerns about the effectiveness and sustainability of financial decision-making processes.

By ignoring the importance of sound governance, policymakers risk further damaging the economy and impeding long-term growth. The negative impact of these deteriorating standards necessitates immediate attention and decisive action.

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