Ackman, Gross Signal Bottom for Treasuries as TLT Surges

Bill Ackman covers his Treasury short position and Bill Gross predicts recession.

kent
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Research Lead
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Reviewed by: etf.com Staff
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Edited by: Mark Nacinovich

Bill Ackman and Bill Gross both started the last full week of October with comments on the social-media platform X sounding alarms about a slowing economy. Just as the 10-year Treasury rate briefly passed the psychological 5.0% yield level, comments from the investing heavyweights appeared to have triggered a price surge of more than 2.0% for the popular long-term Treasury ETF, the iShares 20+ Year Treasury Bond ETF (TLT)

Further signaling the potential for a slowing economy ahead, the Federal Reserve Bank of New York released a report revealing that credit card debt and auto loan delinquencies are at pre-pandemic highs. 

Bill Ackman Covers Treasury Bond Short Position

Hedge fund billionaire and founder of Pershing Square Capital Management, Bill Ackman announced on Monday that he has covered his Treasury bond short position. "There is too much risk in the world to remain short bonds at current long-term rates," Ackman wrote on X, formerly known as Twitter. 

Ackman's bet against 30-year U.S. Treasury bonds paid off as long-term bond prices dropped sharply since early August when he announced his short positions. To "short" an investment, an investor borrows shares of a security from a broker and then sells those borrowed shares on the open market with the expectation that the security's price will fall. 

Ackman’s recent comment indicates that he feels Treasury yields may be near a peak, which would also indicate that he feels Treasury prices may be near their cyclical low. Bond yields and bond prices have an inverse relationship.

Bill Gross Predicts Recession, End of ‘Higher for Longer’ 

Bill Gross, the “bond king” who co-founded Pacific Investment Management Co., or Pimco, and managed Pimco’s Total Return Fund (once the world’s largest bond fund), is calling for a recession in the U.S. by the end of the year. On the same day that Ackman announced his Treasury short covering, Gross wrote on X he believes the spread between the two-year and 10-year Treasury yields will be positive before the end of 2023. 

Citing a rise in auto loan delinquencies, Gross further noted, “’higher for longer’ is yesterday’s mantra,” indicating that he believes that rates won’t remain at current levels because a slowing economy will place downward pressure on Treasury yields. His statement is contrary to what many investors believe, which is that inflation will remain sticky, forcing the Federal Reserve to keep rates higher for longer than previously expected. 

When the 2/10 spread normalizes after being inverted, it has historically pointed to recession. Eight of the last eight recessions commenced not long after the yield curve reverted to its normal status, with the 10-year rate above the two-year. 

Bottom for TLT? 

Since bond prices move in the opposite direction as rates, this week’s comments from Ackman and Gross, as well as new data suggesting consumer spending may slow soon, have investors wondering if Treasury yields are nearing a high, which would mean prices are near a low. For bold investors willing to take the risk, this news could add to reasoning for buying shares of long-term Treasury ETFs like TLT

Meanwhile, the fed-funds futures market predicts 97% odds of a pause at the Fed’s next rate policy meeting taking place Oct. 31 and Nov. 1. As a prelude, the Personal Consumption Expenditures, or PCE, report, which is the Fed’s preferred inflation gauge, will be closely watched this Friday. Investors will be paying attention for any clues about the direction of rates as a cooler PCE reading would be bullish for TLT prices and a hotter-than-expected print could send prices back down and yields back up. 

Kent Thune is Research Lead for etf.com, focusing on educational content, thought leadership, content management and search engine optimization. Before joining etf.com, he wrote for numerous investment websites, including Seeking Alpha and Kiplinger. 

 

Kent holds a Master of Business Administration (MBA) degree and is a practicing Certified Financial Planner (CFP®) with 25 years of experience managing investments, guiding clients through some of the worst economic and market environments in U.S. history. He has also served as an adjunct professor, teaching classes for The College of Charleston and Trident Technical College on the topics of retirement planning, business finance, and entrepreneurship. 

 

Kent founded a registered investment advisory firm in 2006 and is based in Hilton Head Island, SC, where he lives with his wife and two sons. Outside of work, Kent enjoys spending time with his family, playing guitar, and working on his philosophy book, which he plans to publish in the coming year.