(Bloomberg) — Billionaire investor Stan Druckenmiller said he’s bought “massive” bullish positions in two-year notes, as he’s become more worried about the economy.
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In recent weeks, “I started to get really nervous,” Druckenmiller, founder of Duquesne Family Office, said in an interview with hedge fund manager Paul Tudor Jones at a conference last week. “So I bought massive leveraged positions” in the short-term notes, he said.
Druckenmiller has joined a number of prominent investors, including Bill Ackman and Bill Gross, in sounding the alarm about the economy lately. Ackman, founder of Pershing Square Capital Management, said this month that he’s unwound bearish bets on 30-year Treasuries, because “there is too much risk in the world.”
Read more: Ackman, Gross Abandon Bearish Bond View as Yields Bounce Off 5%
Unlike Ackman, Druckenmiller said he’s keeping bearish wagers on longer-term bonds because he’s concerned about swelling government-debt issuance. But with the new bullish bets on two-year notes, overall he is long fixed income for the first time since 2020, he said at a Robin Hood Foundation event in New York. A video of the interview surfaced on social media this week.
Druckenmiller, who managed money for George Soros for more than a decade, has been predicting a hard landing for the US economy for some time. He has said that corporate profits could fall by 20% to 30%, and that the value of commercial real estate will tumble.
In the interview with Tudor Jones, Druckenmiller said he’s observed anecdotal evidence that “on the margin, things are getting softer” as pandemic stimulus is “running down rapidly.” Historically, the simultaneous increases in interest rates, oil and the dollar have been negative for the economy, he added.
Steepener Bet
His paired long-short bond bets means that he’s expecting the yield curve to steepen, a move that typically happens when the Federal Reserve cuts interest rates. Yields on two-year Treasuries jumped to almost 5.3% this month, the highest in more than a decade, as investors absorbed Fed Chair Jerome Powell’s pledge to keep rates high for an extended period.
“Powell talks a good game, but let’s see what kind of game he’s talked about if the unemployment rate is 4.5% and going north,” he said. The rate was 3.8% in September.
If he’s right about the economy, Druckenmiller said two-year yields could fall to 3%, while 10-and 30-year yields remain at the current levels of roughly 5%.
“I am confident the yield curve will normalize,” he said. “That’s a trade I expect to have for some time.”
Druckenmiller said his call for recession hasn’t panned out because a lot of corporates and households are shielded from higher rates as they locked in lower borrowing costs in previous years. But as they move to refinance in the next two years, “you have to be open-minded about something breaking,” he said.
Treasury Critique
In the interview, Druckenmiller blasted Treasury Secretary Janet Yellen for not taking advantage of near-zero interest rates during the pandemic by selling more longer-term bonds, calling it “the biggest blunder in the history” of the department.
“When rates were practically zero, every Tom, Dick, Harry, and Mary in the United States refinanced their mortgage,” Druckenmiller said. “Unfortunately, we had one entity that did not, and that was the US Treasury.”
Druckenmiller reiterated his concern about the growing government-debt burden. If rates stay where they are, the government’s interest expense will amount to 7% of GDP by 2043 — equivalent to 144% of annual discretionary spending today, he said.
“The politicians that are telling you and think they’re not going to cut entitlements, it’s just an outright lie,” he said. “Honestly, I think the math has gone crazy.”
Druckenmiller has a net worth of $9.9 billion, according to the Bloomberg Billionaires Index.
–With assistance from Katherine Burton.
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Source: finance.yahoo.com