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Is Bill Ackman's brilliant move to no longer bet against US long-term bonds a good time to enter the bond market now?

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Is Bill Ackman

In recent times, the significant volatility in the bond market has attracted considerable attention, with the MOVE index for bonds experiencing much higher fluctuations compared to the VIX index for stocks. According to reports from The Wall Street Journal, there has been a substantial influx of funds into U.S. Treasury ETFs with maturities of 20 years or more, with the amount even surpassing the majority of equity funds. Bill Ackman recently stated that he has closed out his short positions in long-dated bonds. The question now arises: Are the high yields in bonds really worth investing in?

Bill Ackman's Recent Brilliant Moves

One of the most accurate recent market investments was made by Bill Ackman, the founder of Pershing Square Capital.

Shorting U.S. Long-Term Bonds in Early August

American billionaire investor and asset management company Pershing Square Capital founder Bill Ackman announced in early August that he was shorting 30-year U.S. bonds.

At that time, Ackman believed:

  • Structural changes including deglobalization, defense costs, energy transition, etc., have led to an increase in long-term inflation levels. However, U.S. long-term interest rates remained at a lower level, which surprised him.
  • From a supply and demand perspective, long-term government bonds seemed to be in an overbought condition.
  • However, the Treasury did not issue more long-term bonds.

Ackman used options to hedge by purchasing put options on bonds instead of directly shorting them. Since his fund holds many stocks, a rise in interest rates would lead to a decrease in stock valuations. By buying put options on bonds, he could hedge his assets with minimal and fixed costs, using the premium paid for the put options to provide protection and create more value.

Accurate Prediction and Operation, Ackman Exits at the Peak

Bill Ackman stated on October 23 that he had closed his short positions on bonds.

Looking at the chart of the U.S. 30-year bond yield below, the yield was only at 4% in early August but soared to 5.12% on October 22. The next day, Ackman announced the closure of their short positions, selling at the peak! The U.S. 30-year bond yield closed at 5.04% last Friday, explaining why Ackman's accurate prediction and operation earned him a profit of $200 million, as reported by Reuters.

Source: Finance M Square

Ackman also explained the reason for closing his positions:

  • The recent geopolitical risks made shorting long-term bonds too risky.
  • The economic slowdown is faster than recent data indicates.

Ackman's view on economic data is similar to that of Cathie Wood, founder of Ark Invest. Since economic data is historical, it has its lag. Ackman believes that the economic slowdown will be faster than expected!

Cathie Wood's viewpoint: Economic data is distorted, prices are about to fall, innovation is necessary!

Recent Bond Market Volatility Surpasses Stock Market

Recent significant volatility in the bond market has drawn high market attention. The MOVE index, representing bond volatility, reached 200, the highest in fifteen years, last seen during the 2008 financial crisis. Even in 2020, during the COVID-19 outbreak, the index only hit 138.

Source: Finance M Square

Compared to the VIX index, which represents stock market volatility, stock market fluctuations are noticeably smaller than those in the bond market. The VIX index, also known as the fear index, signifies irrational panic when exceeding 40. The last time this happened was in 2020 during the COVID-19 outbreak.

Source: Finance M Square

Continuous Inflow of Funds into Bonds, Is the Bond Bull Market Beginning?

The recent significant volatility in the bond market has sparked various discussions. Is the high return on bonds worth investing in?

According to a report by the Wall Street Journal, the net inflow of funds into iShares 20+ Year U.S. Treasury Bond ETF with the code TLT has surpassed that of any other fixed-income ETF and the majority of stock funds so far in 2023. Just on October 24 and 25, the net inflow exceeded $2 billion, bringing the year-to-date net inflow to $21 billion.

Howard Marks Suggests Investing in 9% High-Yield Bonds

Howard Marks, an investment guru who accurately predicted the financial crisis and dot-com bubble, pointed out in a recent memo that the era of making quick money due to highly accommodative monetary policies has ended.

From the current levels, it is evident that interest rates have little room to fall, and I believe short-term rates will not be as low in the coming years.

It turns out that inflation is not temporary. As interest rates rise, concerns about economic recession arise, and worries about potential losses resurface, offering greater compensation for risk taken. Government and corporate bond yields have surged to multi-year highs this month, with non-investment-grade corporate bond yields reaching nearly 9%, more than double that of early 2022.

Although the S&P 500 index has had a slightly higher annual return rate than 10% for nearly a century, conditions are different now. Compared to uncertain stocks, the 9% yield on non-investment-grade corporate bonds is more attractive! Therefore, Howard Marks suggests selling stocks, real estate, hedge funds, and venture capital, and investing in 9% high-yield bonds.

Ray Dalio: Cash Is Good Now, No Longer Junk

Ray Dalio, founder of Bridgewater Associates, who has always believed that cash is trash, recently changed his tune! He said:

Cash is good now! No longer junk!

He emphasized that when he called cash trash in 2020, interest rates were "very low," less than 1%, and now they are "quite good" (around 5.5%).

According to his estimate, the expected return rate provided by the stock market is around 5-5.5%, which is relatively low compared to bond yields. This low return is particularly concerning because bond yields may rise, often leading to a decline in stocks. This makes the almost price risk-free return on cash look quite good relative to expected stock market returns and bond returns. Cash not only provides a good return but also has no price risk, making cash look "quite good" to him.

Although Ray Dalio classifies bonds as close to cash in the article, due to the imbalance in bond supply and demand caused by government deficits increasing supply while buyer demand decreases, he believes that government bond yields must reach 5-5.5% before he becomes interested in bonds. So, in Dalio's mind, the current ranking is:

Cash > Bonds > Stocks

At the tail end of this rate hike cycle, investor uncertainty about the future has increased, resulting in recent stock market declines, significant bond market volatility, and Bitcoin finally surpassing $34K. However, with increasing noise, investors must pay special attention to risks. Adjusting asset allocation and risk management are crucial tasks ahead!