"Not so long ago, a generation ago thought 5 per cent was a high yield for long-term fixed income bonds, but the structure of the world today is very different from the world experienced by that generation." On Friday (September 22), the American hedge fund giant, Pershing Square Capital Management founder and CEO Bill Ackman (Bill Ackman) wrote in X (formerly Twitter).
After the Fed paused last week and delivered a more hawkish message to the market than expected, Treasury yields across all maturities soared. Eastern time on Monday (September 25), the 10-year US Treasury yield, which is the "anchor of global asset pricing", officially broke through 4.5%, a new high since the global financial crisis in 2007; The yield on the 30-year bond approached 4.64 percent on the same day, its highest level since January 2011.
But in his hundreds of words of tweets, Ackman said he was surprised that long-term interest rates were so low. He thinks the US 30-year bond yield will rise to 5.5% instead of 4% today. In addition to Ackman, BlackRock, the world's largest money manager, also said long-term U.S. Treasury yields will move higher.
Lee Hardman, senior currency analyst at Mitsubishi UFJ Financial Group, said in an emailed comment to the National Business Daily that the recent rise in long-term Treasury yields is mainly driven by the hawkish repricing of Fed rate hike expectations and a modest rise in long-term inflation expectations. In addition, the sharp rebound in oil prices to a high of $96 a barrel this month has put upward pressure on market-based measures of inflation expectations.
Blackrock and Altman call: long-term US Treasury yields or continue to move higher
The U.S. real yield is viewed by many in the industry as a measure of the real cost of borrowing and as a barometer of the economic outlook. But it is also important to note that a sharp rise in real yields can put significant pressure on the valuation of assets whose future earnings must be discounted at higher interest rates.
Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, noted in a note that from an economic perspective, the longer inflation-adjusted borrowing costs remain at such high levels, the greater the impact on business and consumer behavior.
In even worse news for the market, looking ahead, BlackRock, the world's largest asset manager, also believes 10-year Treasury yields could move even higher amid renewed hawkish market expectations.
On Monday, BlackRock said in a report that financial markets are coming to terms with the view that interest rates are likely to remain high, and that the volatile macro regime is creating "uncertainty about central bank policy and future risks."
Jean Boivin, head of the BlackRock Investment Research Institute team, said: "The market is accepting our view that interest rates will remain high and now even exceed our expectations for European rates." Rising long-term bond yields suggest that markets are adjusting to the risks of a new regime of greater macro and market volatility."
U.S. hedge fund manager Bill Ackman, founder and CEO of Pershing Square Capital Management, also said recently that he believes the 30-year bond yield will rise further and that his hedge fund is still short the 30-year bond because he believes inflation is still high.
In a post on X (formerly Twitter) on September 22, Ackman said, "The world is structurally different than it used to be. The long-term deflationary effect of outsourcing production to other countries is gone. The bargaining power of workers and unions continues to rise. Strikes abound and are more likely to occur if successful strikes are rewarded with substantial wage increases."
Ackermann believes that no matter how many times Fed Chairman Jerome Powell reiterates the 2 percent inflation target, long-term inflation will not return to 2 percent. "The 2 per cent inflation target was arbitrarily set after the 2008 global financial crisis in a very different world than the one we are in now," he said bluntly. "Mr. Ackermann wrote.
"Long-term inflation, combined with real interest rates and term premiums, suggests that a 30-year yield of 5.5 percent is appropriate," Ackman said.
Ackermann also added that he was surprised that long-term interest rates were so low. He explained that bond investors have always considered 4% to be a high yield because it hasn't been above 4% in the past 15 years. So when investors can see a "chance" to lock in a 4% yield over 30 years, they see it as a "once in a career opportunity." But the world today is very different from the one they have experienced so far.
Neither BlackRock nor Ackman's prediction that long-term Treasury yields will continue to rise is unfounded.
Last week, the Fed kept rates on hold, but the "dot plot" shows that most central bankers see one more quarter-point increase this year, and forecast only about 50 basis points of cuts next year. These figures all suggest that borrowing costs will remain high for longer than in the dot plot of previous resolutions.
Eastern time on Monday, the 10-year US Treasury yield, the "anchor of global asset pricing", officially broke through 4.5%, a new high since the global financial crisis in 2007. The yield on the 30-year bond approached 4.64 percent on the same day, its highest level since January 2011. Outside the U.S., in European markets, the region's benchmark 10-year German Bund yield rose to 2.81 percent earlier this week, also the highest since 2011.
For the Federal Reserve's "dot plot" and economic forecast (SEP) after the release of US bond yields "surge", Mitsubishi UFJ Financial Group senior foreign exchange analyst Lee Hardman in an email to the "Daily Business News" reporter to comment, "the 10-year US bond yield has now risen from the intraday low early this month by about 50 basis points. Over the same period, the 2-year Treasury yield has risen by about 40 basis points, while the 10-year break-even rate has risen by about 12 basis points, suggesting that the rise in long-term Treasury yields has been largely driven by hawkish repricing of Fed rate hike expectations and a modest increase in long-term inflation expectations. In addition, the sharp rebound in oil prices this month, up about $10 a barrel to a high of $96 a barrel, has put upward pressure on market-based measures of inflation expectations."
Jonathan Millar, senior U.S. economist at Barclays, pointed out that the higher policy path of the Federal Open Market Committee (FOMC) may reflect a reassessment of the neutral rate (r*), with the FOMC's projections for 2026 implying a real rate of 0.9 percent at that time. Inflation, GDP growth, and unemployment are all back to their long-run trends. This could signal that the long-term 'dot plot' is finally moving up.
In addition, Millar believes that if so, this would be consistent with the upward revision of r* estimates from the Dynamic Stochastic General Equilibrium Analysis (DSGE, the basic research paradigm of modern mainstream macroeconomic theory) model released by the New York Fed last week, which, like the Fed SEP, also upgraded economic activity for this year.
"But unlike the SEP, the DSGE model suggests that economic activity in the U.S. would need to fall well below its long-run trend for inflation to (gradually) return to 2 percent." This trajectory is also more consistent with the FOMC's recent public statements, including Fed Chair Jerome Powell's Jackson Hole speech, which emphasized the need for a period of below longer-run trend GDP growth and some easing in labor market conditions for inflation to gradually return to 2 percent." "Millar added.
Long-term US Treasuries were "abandoned" by the market, and the largest US long-bond ETF suffered the biggest pullback in history
The Daily Economic News reporter noted that, in fact, compared with the long-term US Treasury bonds that were sold recently, the short-term and medium-term US Treasury bonds suffered relatively small selling pressure overnight, but the term yields were also higher. Among them, the 2-year Treasury yield rose 2.2 basis points to 5.136%, continuing to stay above the 5.1% mark, the 3-year Treasury yield rose 3.7 basis points to 4.84%, and the 5-year Treasury yield rose 5.9 basis points to 4.62%.
In fact, long - and short-term Treasury yields are closely related to changes in the amount of capital they have attracted this year.
According to Reuters, short-term Treasuries have attracted more investment than long-term Treasuries this year, an unusual phenomenon caused by the "inverted" yield curve and the Federal Reserve's intention to "higher for longer" policy.
Specifically, the Fed's aggressive rate hikes and hawkishness have kept short-term Treasury yields high for much of this year, with 1-year yields already about 1 percentage point higher than 10-year yields. This means that global investors will seek short-term Treasuries for the extra yield and premium, and avoid longer-term Treasuries, which are relatively illiquid.
According to Morningstar, $29.3 billion has flowed into short - and intermediate-term Treasury funds (one - to six-year maturities) in the first eight months of this year, up 70.3 percent from a year earlier. On the other hand, inflows into US Treasury funds, which invest in bonds with maturities of more than six years, fell to $36.9bn, down 11.5 per cent from a year earlier.
According to foreign media reports, the $39 billion iShares 20-plus year U.S. Treasury Bond ETF (the largest long-bond ETF in the United States) has now fallen 48% from its all-time high in 2020 and was last trading at its lowest price since 2011. On a year-to-year basis, the iShares 20-plus Treasury ETF is down about 10 percent this year, after falling 33 percent last year. At the same time, short bets against the ETF are increasing further, with short positions as a percentage of funds in circulation reaching their highest level in about a month, according to IHS Markit Ltd.
In addition, other long-term funds have been hit hard, with the Vanguard Extended Maturity Treasury ETF (EDV) down 14% this year and the PIMCO 25-plus Zero Coupon Treasury Index (ZROZ) down more than 15%.