Just Three Tweets! That's All It Took For Bill Ackman To Earn A $200 Million Profit On US Govt Bonds

Just three tweets. That's all it took for billionaire hedge fund manager Bill Ackman to earn an eye-watering profit of $200 million from his high-profile bet against US govt bonds. 57-year-old Bill Ackman, with a net worth of $3.5 billion (as per Forbes), is the founder of American hedge fund company Pershing Square Capital Management.

What Had Bill Ackman Tweeted?

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Bill Ackman had tweeted earlier this week on Monday that he had exited the short position he first announced in August, as per British financial media giant Financial Times.

His post helped fuel a recovery in Treasury prices after an earlier sell-off had pushed yields to 16-year highs. ¡°There is too much risk in the world to remain short bonds at current long-term rates,¡± he said on X, formerly Twitter. ¡°The economy is slowing faster than recent data suggests.¡±

We covered our bond short.

¡ª Bill Ackman (@BillAckman) October 23, 2023

The economy is slowing faster than recent data suggests.

¡ª Bill Ackman (@BillAckman) October 23, 2023

How He Earned $200 Million Profit?

Bill Ackman made the bet against 30-year bonds using options, derivatives that allow traders to profit from a fall in prices without having to borrow and sell the underlying bonds, the people familiar with the trade said. While he made about $300 million from moves in the market, he also paid out nearly $100 mn in premiums that allowed him to maintain his position.

The $200 mn profit helped Pershing Square¡¯s $13bn flagship fund gain 11.6 per cent in the year to October 17, according to figures published by the firm. When Ackman announced his latest bet against US government debt, 30-year Treasuries were yielding about 4.3 per cent.

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Also Read: Why A Recession Is Still Likely To Hit The US As Soon As This Year

Why His Profit Is Connected To A Bet He Made Last Year?

The gains from Ackman¡¯s recent trade are dwarfed by the $2.3 billion he netted from another bond market short last year, as per the report.

He entered that bet, which was mostly focused on two-year Treasuries, in December 2021. The trade was described in investor documentation as a hedge for his stock portfolio which fell sharply in value during last year¡¯s bear market. The profits from that bond trade did not fully offset losses in equities, leading to the fund falling 8.8 per cent last year. He also made $2.6 billion during the early stages of the Covid-19 pandemic from bets that companies would struggle to pay their debts.

Bill Ackman was among a small number of investors to call the COVID-19 crisis early.

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Yields have fallen back to roughly 5.09 per cent after momentarily reaching a high of 5.18 per cent on Monday. Ackman had claimed that longer-term Treasury bonds were "overbought" in August.

According to him, persistently high inflation increased the likelihood that the US Federal Reserve would raise interest rates, which would have a negative impact on bond prices and raise yields. In addition, he predicted lower prices and stated that "an increasing supply of [Treasuries] is assured" due to the significant US government deficit. Investors' concerns that the Fed would maintain higher rates for an extended period of time have caused long-dated Treasury yields to spike higher since then. Before the sell-off resumed, yields briefly dropped again earlier this month following the start of the conflict between Israel and Hamas.

As per some analysts, the possibility of a worsening conflict in the Middle East might increase the appeal of Treasury bonds, which offer investors a safe haven. However, investors are becoming uneasy due to the conflict between Israel and the Islamist group Hamas, which implies Treasuries may turn into a safe investment option. After a slight decline, yields currently stand at 5.08%.

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