July 11, 2024

Bill Ackman’s Warning: Long-Term Interest Rates May Soar, Retirees on High Alert

The bond market is in chaos, with plunging bond funds and sky-high long-term interest rates—reaching levels not seen since the Bush era. But don’t be too quick to think the worst is over and jump in to buy. That’s the word from Bill Ackman, a legendary yet controversial hedge-fund manager.

This matters a lot for retirees and those relying on investment income. Typically, they’re advised to have a chunk of their bond portfolio. In his latest message to investors in his Pershing Square fund, Ackman warns that long-term interest rates could surge another 27% from here.

The interest rate on 10-year Treasury notes, a key benchmark for the economy, has rocketed from 3.8% to 4.3% in just a month, hitting a high last seen in 2007, before the financial crisis.

Don’t get too comfortable with these rates. Ackman argues, based on math and history, that they could quickly spike even higher to 5.5%

This could have significant consequences, causing a 10% drop in Treasury bond prices, potentially rattling the stock and real estate markets.

“We believe that long-term interest rates can continue to rise substantially from current levels,” Ackman writes. “Investors have become so accustomed to low long-term rates for many years that 4.3% seems like a high long-term rate for many fixed income investors.” He adds that when you look at history and do the math, “We do not believe that current levels of long-term Treasury rates are high.”

Why the concern? Ackman argues that we’ve become complacent about rates due to recent history. He factors in inflation stabilizing at 3%, a 0.5% real short-term interest rate, and a 2.0% historical term premium. In short, he’s saying inflation at 3% and long-term Treasury bonds offering 2.5% above inflation.

To be sure, Ackman is talking about his book: His hedge fund holds bets on higher interest rates, counterbalancing various bullish bets on stocks. “We continue to hedge the risk of a rise in 30-year Treasury rates because we remain concerned about the risk of higher long-term interest rates on equity valuations,” he writes. 

Whether he’s right hinges on two points: the Fed tolerating higher inflation and future Treasury bond buyers demanding higher interest rates in real terms (above inflation).

Why would the Fed accept 3% inflation? Ackman points to factors like increased defense spending, energy challenges, green energy transition costs, trade protection, and labor’s stronger bargaining position.

Additionally, he sees supply and demand factors at play in Treasury bonds. The U.S. government’s growing deficit means more borrowing, but foreign countries like China may be less willing to lend. The Treasury will be trying to offload $1.9 trillion in bonds in the coming months.

For investors seeking safety from inflation, inflation-protected Treasury bonds are an option. As for Ackman’s prediction of “real rates” rising to 2.5%, only time will tell. It’s a bold call, and while it’s possible, it’s not a sure bet.

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