Bill Ackman, the founder of Pershing Square Capital Management, has revealed that he is betting against 30-year US Treasury bonds as a hedge in a world with persistent 3% inflation.
The hedge fund billionaire sees this as a high-probability standalone bet with reasonably asymmetric payoffs.
Rather than shorting bonds directly, he opts to purchase options as hedges, citing historical instances of the bond market repricing the long end of the curve quickly.
His bearish comments came after rating agency Fitch downgraded the US's long-term rating to AA+ from AAA, expressing concerns about the growing US fiscal deficit.
Ackman argued that if US inflation stays at 3% in the long term, 30-year Treasury yields could hit 5.5% soon.
He expressed surprise at the low long-term rates, considering structural changes that could lead to higher long-term inflation, including de-globalization, higher defence costs, the energy transition, growing entitlements, and increased bargaining power of workers.
Other factors he pointed out included the desire of China and other countries to financially decouple from the US, concerns about US governance, fiscal responsibility, and political divisiveness.
Additionally, Ackman anticipated that the ending of yield curve control in Japan would make Japanese government bonds more appealing compared to US Treasurys, as Japanese investors are currently the largest foreign buyers of US Treasury bills.
The billionaire investor has a history of successful bets, including shorting mortgage loan companies Fannie Mae and Freddie Mac (OTCQB:FMCC) in 2007 before the great financial crisis.