Dividend Stocks

Investors Beware: Bill Ackman Just Issued a Big Warning

Don’t bet against bond yields in the current environment. That’s the warning from hedge fund manager Bill Ackman.

Ackman, the 57-year-old Wall Street veteran who runs the Pershing Square Capital Management hedge fund and has a net worth estimated at $3.5 billion, says he covered his bet against long-term U.S. Treasurys because the economic environment is worse than expected and bond yields are likely to continue rising.

“There is too much risk in the world to remain short bonds at current long-term rates,” Ackman said in a post on social media today (Oct. 23). “We covered our bond short.”

Bond Yields at a 16-Year High

Ackman had been betting against Treasury yields continuing to rise. The hedge fund manager had expected yields on long-dated government debt instruments to fall as the year progressed. But that hasn’t happened. Instead, Ackman closed his short bet against U.S. Treasurys on the same day that the yield on the benchmark 10-year Treasury bond rose above 5% and reached its highest level since July 2007.

The 10-year yield reached 5.004% in early trading today, climbing eight basis points higher in the past 24 hours. The yield on the 10-year Treasury has now risen 160 basis points since mid-May of this year and is at its highest level in 16 years. The rise in the 10-year Treasury yield comes amid a steep selloff in the bond market. Bond yields move inversely to prices.

Bill Ackman Warns of Economic Decline

Ackman also said that he closed out his short bet against bonds because he feels the U.S. economy is in worse shape than people realize, saying in his social media post that: “The economy is slowing faster than recent data suggests.”

The U.S. Federal Reserve has raised interest rates 11 times for a total of 5.25 percentage points, taking its benchmark Fed Funds Rate to its highest level in 22 years. However, Fed Chair Jerome Powell said on Oct. 19 that inflation remains too high and lower economic growth is likely needed to bring it down to more sustainable levels. Data has shown that while inflation remains above the Fed’s 2% annualized target, it has declined to 3.7% from a peak of 9.2% in June 2022.

Bond traders have been selling government debt instruments at the same time that the Fed has been flooding the market with new issues as it unwinds its holdings. The U.S. Federal Reserve is reducing its bond holdings after buying Treasurys during the Covid-19 pandemic to help support the economy. The rise in bond yields has been putting stocks under pressure as the higher yield presents an attractive alternative to equities and is enticing investors to shift capital.

Yields on all U.S.-dated bonds have been marching higher. The yield on the two-year U.S. Treasury rose as much as four basis points to reach 5.125%, while the 30-year Treasury yield increased eight basis points to touch 5.164%. Yields came down somewhat after Ackman’s announcement on social media that he ended his short bet against U.S. Treasurys.

What’s Next

The tug-of-war between bonds and stocks looks likely to continue for the foreseeable future. That Bill Ackman has covered his short bet against U.S. Treasurys can be taken as another bearish sign for equities. If bond yields do continue rising in the near term, stocks can be expected to continue the selloff that began in August this year. The benchmark S&P 500 index has now declined more than 5% since July 31.

On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.