How Bill Ackman set off a wild night on markets

Did Ackman turn the market, or at least signal the bottom is in for bonds?

Given the sheer size of the bond market, it seems unlikely one investor could have that influence. It seems more likely the market has seen 5 per cent bond yields as a signal to start buying and, as this year has shown, even little moves on bond markets can quickly gain momentum.

As to whether bonds have peaked, Ackman’s view is clear. “There is too much risk in the world to remain short bonds at current long-term rates,” the founder of Pershing Square posted. “The economy is slowing faster than recent data suggests.”

His view was supported by Bill Gross, the former head of bond giant PIMCO, who took to X on Monday night to predict that a US recession would start before Christmas.

“Regional bank carnage and recent rise in auto delinquencies to long-term historical highs indicate the US economy slowing significantly,” Gross posted.

Chanticleer is not as certain that yields have peaked as Ackman and Gross seem to be.

Even leaving aside the potential for higher oil prices to boost inflation again, the supply and demand issues in the bond market – that is, the highly indebted US government needs to issue mountains of bonds, and it’s not completely clear who’s going to keep buying them – could still put upward pressure on yields.

But there’s no question that Ackman and Gross make an important point: it’s slower economic growth that will bring interest rates down, and a slowing economy is typically not good for corporate earnings or share prices. If yields are retreating because the US economy is about to enter recession in a matter of months, that’s not exactly going to support a rally in risk assets.

Spell broken

Equity markets seemed to get this message. While we might have expected stocks to rally on the dramatic plunge in bond yields, sentiment remained muted. For the past 15 straight weeks, the S&P 500 had moved up on Monday, but the spell was broken overnight, and the index was down 0.17 per cent.

Two of Wall Street’s more bearish strategists, Morgan Stanley’s Michael Wilson and JPMorgan’s Marko Kolanovic, both point out that the 5 percentage points in interest rate increases that the US Federal Reserve has already delivered are still working their way through the system.

Kolanovic also notes that the more recent tightening of financial conditions as a result of surging bond yields will only compound this, meaning lags will be felt “until well into 2024”.

With the September-quarter earnings season in the US producing fairly middling results, Wilson says “earnings expectations are likely too high for the fourth quarter and 2024 and policy tightening likely to be felt from both a monetary and fiscal standpoint”.

High bond yields are no fun for investors. But a sharp retreat won’t necessarily mean good times are around the corner.