With the expectation that rate hikes will be dissipating, fixed income investors may start to look at long-term Treasury debt again. However, hedge fund titan and Pershing Square Capital Management founder Bill Ackman said the opposite.
A confluence of factors contributed to Ackman’s bet on shorting Treasury notes, including a potential de-dollarization by China (and other countries), sticky inflation, rising defense costs, long-term Treasuries residing in overbought territory, and more. In short, yields could stay elevated for longer than generally anticipated, pushing down prices over time.
According to a Wall Street Journal report, Ackman is “short the 30-year Treasury bond, in a bet that long-term inflation will settle closer to 3% than the Federal Reserve’s target of 2%.” The full X post is as follows:
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…
— Bill Ackman (@BillAckman) August 3, 2023
Ackman’s strategy does not stop at simply shorting long-term bonds, but rather playing prices on options. He noted that long-term bond prices can re-adjust in weeklong timeframes based on historical reference.
“We implement these hedges by purchasing options rather than shorting bonds outright,” Ackman added. “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.”
Tail Ackman’s Bets With 2 ETFs
If Ackman’s short bets on long-term bonds prove correct, traders — particularly of the bearish variety — can use inverse exchange traded funds (ETFs) from Direxion Investments. For Treasury notes, consider using the Direxion Daily 20+ Yr Trsy Bear 3X ETF (TMV) and the Direxion Daily 7-10 Year Treasury Bear 3X Shares (TYO).
TMV seeks daily investment results before fees and expenses of 300% of the inverse of the daily performance of the ICE U.S. Treasury 20+ Year Bond Index. The index is market-value-weighted and includes publicly issued U.S. Treasury debt securities that have a remaining maturity of greater than 20 years.
TYO seeks daily investment results before fees and expenses of 300% of the inverse (or opposite) of the daily performance of the ICE U.S. Treasury 7-10 Year Bond Index. The index is a market-value-weighted index that includes publicly issued U.S. Treasury securities that have a remaining maturity of greater than seven years and less than or equal to 10 years.
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