Ackerman's Bearish View on US Long-term Treasury Bonds

I believe that long-term interest rates, such as 30-year interest rates, will further rise. Therefore, we still short bonds by holding Swaption.

The world is structurally different. The peace dividend no longer exists. The chronic deflationary effects of outsourcing production to China no longer exist. The bargaining power of workers and unions continues to increase. Strikes abound and are more likely as successful strikes lead to significant wage increases.

Energy prices are rising rapidly. Not refilling SPR is a wrong and dangerous mistake. Our strategic assets should never be used to achieve short-term political goals. Now we must replenish strategic oil reserves while OPEC and Russia cut production.

The costs of the green energy transition are and will be difficult to estimate. Rising gas prices will raise inflation expectations. Just ask the average US person. They see prices at gas stations and grocery stores and do not believe inflation is slowing.

Our national debt has reached $33 trillion and is rapidly increasing. Neither party nor presidential candidate shows any signs of fiscal discipline. Every debt ceiling is an opportunity for our divided government and its most extreme actors to gain media attention and our country to threaten default. This is not a good way to recruit the many new buyers needed for bonds.

The government sells hundreds of billions of bills, notes, and bonds every week. China and other countries, historically the main buyers of our debt, are now dumping our debt. The QT experiment has just begun. Imagine trying to conduct a large-scale initial public offering, with underwriters, insiders, and short sellers all selling at the same time, competing to reach every bid during the decline while analysts downgrade their ratings to "sell".

Our economic performance exceeded expectations. Major infrastructure spending began to contribute to economic growth and additional debt supply. Economic recession forecasts have been postponed until after 2024.

No matter how many times Chairperson Powell reiterates his goal, the long-term inflation rate will not return to 2%. After the financial crisis, it was arbitrarily set at 2% in a world completely different from the one we live in now.

One evening, I met the CIO of one of the world's largest fixed income asset managers and asked him how things were going. He looked like he had had a rough day. He greeted me with "too many bonds" - a veritable tsunami of new publishers every week. I asked him what he planned to do about it. He said: "The only thing you can do is walk away."

I am surprised by the low long-term interest rates. I think the best explanation is that bond investors believe that 4% is a high interest rate because the interest rate has not broken through 4% in nearly 15 years. When investors see the "opportunity" of locking in 4% for 30 years, they see it as a "once-in-a-lifetime opportunity", but today's world is completely different from the world they have experienced so far.

Long-term inflation rates plus real interest rates plus term premiums indicate that 5.5% is an appropriate yield for 30-year government bonds. It also questions whether a real long-term interest rate of 0.5% is sufficient in an increasingly risky world.Technical Fundamentals may lead to further increases in yields, especially in the short term. Today we see the beginning of all this.

Not long ago, the previous generation believed that a 5% interest rate was a lower interest rate for long-term fixed-rate debt.But I could be wrong, artificial intelligence could save us.