Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.
Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.
Here’s what you need to know this week.
Bill Ackman cashes out his bond short
Pershing Square investment trust manager Bill Ackman is well known for making bold investment calls on the direction of bond prices and interest rates, by using derivatives, alongside owning a concentrated portfolio of high-quality shares.
One of his recent bets has been that long-dated US Treasury bond yields would rise as a result of bond prices falling. His view was that inflation would be higher for longer and long bonds did not currently reflect that trend.
His trade worked out – US 30-year bond yields have risen from 4% to 5% over the past three months. Ackman has now cashed out his trade which, according to the Financial Times, has netted him $200 million (£165 million) in profits.
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- Don’t expect UK interest rates to fall in 2024
- Bond Watch: what ‘higher for longer’ rates mean for bond prices
Ackman said on X (formerly Twitter): “There is too much risk in the world to remain short bonds at current long-term rates. The economy is slowing faster than recent data suggests.”
His view is that economic pain will force central banks to reassess interest rate rises, which would be good news for bond prices. There could also be a “flight to safety”, with investors buying the safest government bonds, if there is economic pain in 2024.
US long-dated government bonds fall in value this year
Source: Refinitiv, 27 October 2023. Past performance is no guide to future performance.
But the US economy shows no signs of slowing
Nevertheless, new data showed that the US economy in the third quarter of 2023 grew 4.7% year-over-year, the fastest growth in nearly two years.
It means that despite higher borrowing costs, low unemployment in the US and rising wages mean that spending has remained very strong.
Neil Birrell, chief investment officer at Premier Miton Investors, says that this points to the US central bank keeping interest rates higher for longer.
He said: “The US economy is flying high, the annualised GDP number was considerably higher than expected in the third quarter.
“The data we are seeing will be giving the Federal Reserve plenty to think about when they meet. We have a strong economy, inflation that is moderating, a decent jobs markets and a consumer sector that is still spending. What will the central bank make of that? It points to ‘higher for longer’ being the outcome.”
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