At a time when this autumn's "US debt storm" has made major stock and bond exchange markets face great enemies, some Wall Street tycoons with a keen sense of smell seem to have found opportunities from this crisis
Former Soros deputy and billionaire investor Stanley Druckenmiller recently stated that due to his greater economic concerns, he has bought a "large" long position in two-year bonds in recent weeks.
The founder of Duquesne Family Office said in an interview at a conference last week, "In recent weeks, I have become very nervous. That's why I have bought a large leveraged position in short-term bonds
This move also made Druckenmiller join the ranks of Bill Ackerman, Gross and other Wall Street tycoons. These investors have recently changed their earlier pessimistic view of the US bond market due to their concern about the US economic recession. Ackerman, the founder of Panxing Plaza, said in late October that he had covered the short position of 30-year US treasury bond bonds because "the risks in the world are too great"
However, slightly different from Ackerman, Druckenmiller stated that he still maintains a short bet on longer-term bonds because he is concerned about a significant increase in US government bond issuance. But he also pointed out that the move to buy a long position in two-year US Treasury bonds was, overall, his first long position in fixed income products since 2020.
From the bond market trend of the past month, the yield of the 30-year treasury bond bond of the United States rose by more than 30 basis points in October, which is the seventh consecutive month that the long-term yield rose, but the yield of the two-year treasury bond basically did not change that month
Pessimistic views on the economy
Druckenmiller was once Soros' behind the scenes strategist, and his famous work was helping Soros snipe the pound in 1992. The industry once described him as the most profitable machine in history.
For some time now, Druckenmiller has been predicting a hard landing for the US economy. He once stated that corporate profits may decrease by 20% to 30%, and the value of commercial real estate will also significantly decline.
In the latest interview, Druckenmiller stated that he observed some evidence that the situation is getting worse as stimulus measures are "rapidly depleted" during the pandemic. He added that historically, the simultaneous rise in interest rates, oil, and the US dollar has been detrimental to the economy.
Druckenmiller currently holds both short bond long and long bond short positions, which means he expects the yield curve to steepen - a situation that typically occurs when the Federal Reserve cuts interest rates.
In late last month, the upside down of the two-year/10-year US Treasury yield curve narrowed to -11 basis points, the smallest upside down since July 2022. Currently, many traders are observing whether this critical part of the yield curve will end upside down and turn positive, which is common before the start of an economic recession.
Druckenmiller criticized the Federal Reserve, saying, "Powell is right, but let's see what else he can do if the unemployment rate reaches 4.5% and continues to rise." The US unemployment rate was 3.8% in September, and October data will be released on Friday.
Druckenmiller said that if his judgment on the economy is correct, the two-year US Treasury yield may drop to 3%, while the 10-year and 30-year US Treasury yields will remain around the current high level of about 5%. He pointed out, "I believe the yield curve will tend to normalize. This is a transaction that I expect to continue for a period of time
Druckenmiller pointed out that the reason why his expected economic recession has not yet materialized is because many businesses and households have locked in lower borrowing costs in previous years, thus avoiding the impact of rising interest rates. But as they refinance in the next two years, people must be open to the possibility of something happening.
Increased concerns about government debt burden
In the interview, Druckenmiller also criticized US Treasury Secretary Yellen for not taking advantage of the near zero interest rate opportunity to sell more long-term bonds during the pandemic, calling this the "biggest mistake in Treasury history".
Druckenmiller said, "When interest rates were almost zero, almost every American refinanced their mortgages. Unfortunately, we had one entity that did not do so - the US Treasury
Druckenmiller reiterated his concerns about the increasing government debt burden. He stated that if interest rates remain the same, by 2043, the government's interest expenditure will reach 7% of GDP, equivalent to 144% of the current annual discretionary expenditure.
He criticized, "Those politicians who tell you they won't cut social welfare are completely lying. To be honest, I think the numbers are already crazy.