To The Moon

Bill Ackman, who short on long-term US bonds, tweeted on October 23 that he had closed his position, for the current economic slowdown was more severe than the current data suggested, and the high yield of long-term US Treasury bonds was unsustainable. $iShares 20+ Year Treasury Bond ETF(TLT)$

Why are long-term US bond yields rising?

US bond yields and bond prices are inversely proportional, and secondary market supply and demand can also affect yields through prices;

Long-term US bond yields reflect expectations for future economic growth, while short-term yields are a direct reflection of market interest rates.

As we have previously analyzed, the continuous rise in US bond yields is a comprehensive result of "economic growth" and "increased supply".

Among them, economic growth may be reflected in the recovery of economic data, such as the improvement of consumer confidence data after inflation slows down; it can also be reflected in the better-than-expected corporate earnings reports, such as the advertising business rebound shown by companies such as Google and Meta (the barometer of the economy). Although factors such as geopolitics and the rebound in commodity prices still exist, as long as the following conditions are met, it is enough to promote the continued rise in long-term US bond yields:

1. As long as investors believe that the economy is growing, regardless of whether it is actually growing or not;

2. The Federal Reserve's indication of maintaining higher and longer-lasting interest rate levels does not mean that it will relax its tightening stance.

Therefore, since October, the rise in the 10-year US bond yield has been largely contributed by actual interest rates rather than short-term inflation.

9月美联储点阵图

On the other hand, the continued issuance of US government bonds and concerns about their continued development have caused an imbalance in the supply and demand of government trading. The dismal auction of 30-year US bonds a few days ago also lowered prices and accelerated the rise in long and short-term US bond yields. Future issues such as war may bring more government spending and raise the US debt ceiling.

To a certain extent, the 5% US bond yield also includes a premium brought about by short-term secondary market liquidity.

Bearish on US Treasury yields?

From a trading perspective, price changes caused by liquidity tend to be corrected in the short term. This is why Bill Ackman's decision to close his short position at this time is wise. We believe:

1. Due to excessive supply depressing prices, they may be filled by other short positions and speculative international buyers in the short term. He is ahead of the curve in this regard.

2. The main buyers of long-term US bonds are US pensions and mutual funds, while significant international buyers (such as Japan and China) have yet to enter the market.

3. The probability of the Federal Reserve raising interest rates further is very high, implying that the economy may decline, which would prompt more (long-term bond) investors to shift to short-term government bonds, flattening or even inverting the yield curve and further pushing down long-term interest rates, driving up prices.

Although there are panic voices in the market shouting "US bond yields could rise again to 6%+", we believe that this is only an extreme scenario after extreme liquidity scarcity. The longer the current yield levels are maintained, the more detrimental it is to the economy, contradicting the higher yields driven by real interest rates.

Perhaps more investors will choose the cautious right-side trade, but we believe that the peak of US bond yields has arrived and it may be one of the best-performing assets in the coming months.

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