Early futures action indicates Friday may see the S&P 500
SPX
recover a small portion of the 2.8% lost over just the last three sessions.
Equities buckled as implied borrowing costs of varying duration shot up. The yield on 2-year Treasurys
BX:TMUBMUSD02Y
hit their highest since 2006, and for 10-years
BX:TMUBMUSD10Y
it was the most since 2007.
Investors can even lock in a 4.55% yield from the 30-year U.S. bond, or long bond,
BX:TMUBMUSD30Y,
the best since 2011, should they wish to do so.
But they should not, warns hedge fund titan Bill Ackman: “I believe that long-term rates, e.g, 30-year rates, will rise further from here. As such, we remain short bonds through the ownership of swaptions.” (A swaption is a type of options contract that allows buyers to enter into a swap agreement at a specified interest rate for a specific period.)
In a long message posted on on X late Thursday, the boss of Pershing Square Capital Management presented a litany of reasons why longer duration government paper will be pressured in coming years.
Let’s start with inflation, which particularly hurts longer-maturity fixed income, and which Ackman reckons is going to be stubbornly higher than people currently think.
“The world is a structurally different place than it was,” Ackman says. “The peace dividend is no more. The long-term deflationary effects of outsourcing production to China are no more. Workers and unions’ bargaining power continues to rise. Strikes abound, with more likely to come as successful walkouts achieve substantial wage gains,” he adds.
Rising energy prices also will continue to build inflationary pressures. The U.S. will have to refill its strategic petroleum reserve while OPEC and Russia curb production, and “the green energy transition is and will remain incalculably expensive,” he says.
Furthermore, with the U.S economy outperforming expectations, recession predictions have been pushed back to 2024. “The long-term inflation rate is not going back to 2% no matter how many times Chairman Powell reiterates it as his target. It was arbitrarily set at 2% after the financial crisis in a world very different from the one we live in now,” says Ackman.
Then there’s supply. The U.S. national debt is $33 trillion and rising rapidly with no sign of fiscal discipline by either party, Ackman observes. Major government infrastructure spending is adding to the debt load. The government is selling hundreds of billions of bills, notes and bonds weekly, while the Fed is also providing supply by starting its quantitative tightening.
“Imagine trying to do a massive IPO where the underwriter, insiders and short sellers are all selling at once, competing to hit every bid on the way down while the analysts downgrade their ratings to ‘Sell’,” says Ackman.
Which brings us to demand. Ackman notes that China and other foreign nations, historically major buyers of U.S debt, are now selling, perhaps scared off by Washington’s budget machinations.
“Each debt ceiling is an opportunity for our divided government and its most extreme actors to get media attention, and for our nation to threaten default. This is not a good way to recruit the many new buyers we need for our bonds,” Ackman bemoans.
He describes recently meeting the chief investment officer of one of the world’s largest fixed income asset managers and asking how it was going: “He looked like he had had a tough day. He greeted me by saying: ‘There are just too many bonds’ — a veritable tsunami of new issuance each week. I asked him what he was going to do about it. He said: ‘The only thing you can do is step away’.”
Ackman reckons that the best explanation for long-term rates being as low as they still are is that because bond yields hadn’t been above 4% for nearly 15 years, that level seemed attractive. “When investors saw the ‘opportunity’ to lock in 4% for 30 years, they grabbed it as a ‘once-in-their-career opportunity,’ but today’s world is very different from the one they have experienced up until now,” he says.
So, where should yields be? “The long-term inflation rate plus the real rate of interest plus term premium suggests that 5.5% is an appropriate yield for 30-year Treasurys. And [I] query whether 0.5% is a sufficient real long term rate in an increasingly risky world,” says Ackman.
“It wasn’t that long ago that a previous generation thought five percent was a low rate of interest for a long-term, fixed-rate obligation. But I could be wrong. AI might save us.”
Ackman revealed he had taken a short position in the the 30-year bond on August 3rd, shortly after Fitch Ratings downgraded the U.S. credit rating. Since then the 30-year yield had risen about 28 basis points.
Markets
U.S. stock-index futures
ES00,
YM00,
NQ00,
are mostly mildly firmer as benchmark Treasury yields
BX:TMUBMUSD10Y
inch lower. The dollar
DXY
is higher, while oil prices
CL.1,
gain and gold
GC00,
rises.
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The buzz
U.S. economic data on Friday, include S&P flash manufacturing and services PMIs for September, due at 9:45 a.m. Eastern.
Now the Federal Reserve has made its September policy decision the members are free to start chatting publicly again. Fed Governor Lisa Cook will speak at 8:50 a.m., Boston Fed President Susan Collins will make comments at 10 a.m., while Minneapolis Fed President Neel Kashkari and San Francisco Fed President Mary Daly talk at 1 p.m..
The Bank of Japan kept interest rates in negative territory and said it would maintain its ultra-loose monetary policy until inflation sustainably hits its 2% target. Data released earlier showed core annual inflation of 3.1% in August, the 17th consecutive month that inflation has been sustained above the BoJ’s target.
The U.K’s competition regulator said it would provisionally approve Microsoft’s
MSFT,
$75 billion acquisition of Activision Blizzard
ATVI,
Shares of Scholastic Corp.
SCHL,
are dropping 19% in premarket action after the children’s book publisher reported a worse-than-expected second-quarter loss.
Amazon.com
AMZN,
says it will add limited advertising to Prime Video service starting in early 2024.
Best of the web
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The chart
Markets are fast approaching the fourth quarter, toward the end of which tends to be a good time for stocks. Intriguingly, though, that’s just when retail investors pull back from the action, according to this chart of net inflows from Vanda Research.
“[H]istorical data indicates that retail investors typically exhibit reduced buying activity during the fourth quarter…While pinpointing the precise cause remains elusive, the recurrent nature of this pattern is clear,” says Vanda.
Top tickers
Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.
| Ticker | Security name |
|
TSLA, |
Tesla |
|
NVDA, |
Nvidia |
|
AMC, |
AMC Entertainment |
|
NIO, |
NIO |
|
TTOO, |
T2 Biosystems |
|
AAPL, |
Apple |
|
AMZN, |
Amazon.com |
|
GME, |
GameStop |
|
NKLA, |
Nikola |
|
MULN, |
Mullen Automotive |
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