DIVERGING INVESTMENT THESIS ON US TREASURIES.

BONDS THESIS 2023: BILL ACKMAN v WARREN BUFFET

By Chinedu Okoye
August 7, 2023


Bill Ackman and Warren Buffett have diverging views on bonds. Buffet is long 10 US Treasuries. Bill Ackman sooined that 30 year notes if long-term inflation is 3% not 2%. An analysis is made for both below in attempt to explain the rational of both heavyweight Investors.

Reasoning:

Warren Buffets:
 1. Value: 10 yr Treasuries are cheap when compared to the safety of the returns.

 2. Longer term view and staying power.

 3. Value: At over 4% US 10 yr Notes provide value compared to Investment Grade and High Yield

 4. Liquid: Treasuries are readily convetable to cash.

 5. Price Appreciation: There are possibilities that yields could go down, in the event of a pause or a cut the Fed.


Bill Ackman:

 1. Higher Interest and Inflation Rars for Longer: At 3% long term inflation, the Fed could hold rates higher for longer, as markets anticipate one more hike this year.

 2. Tighter Yield Spread Differentials: Outflows to JGBs and EM could skyrocket if the US holds for longer at and inflation stays at 3%.


Rationalizing Both Thesis:

Warren Buffett:

As the cost of higher rates kicks in from debt refinancing, the Private sector could face a liquidity squeeze as yields in the safest assets (Treasuries) rise guaranteeing attractive returns (4.027% as of the time of this write-up), if you hold till maturity.

Warren Buffett is renowned for holding riskier assets for longer and is driven by value and not growth ( or income and not price appreciation).
Cash out options exist if price appreciates from a possible pause in interest rates hikes. A change in sentiment could sour this rise .

This would push the credit quality of private sector lenders down, and thought the spread is juicy, fund managers would likely move to to the US Treasuries.

As a result Japanese Government Bonds JGBs are expected to outperform USTs if inflation - which have been suppressed bybultra essin ookicies for years - keeps rising in Japan.


Bill Ackman:

If inflation stays at 3% for longer outside the Fed's target, and a recession doesn't come from an overtightning, the Fed is likely to hold benchmark rates at 5.5% for longer.

A healthy economy and reduced wage pressures could also see credit quality maintained and tighten yield spreads on corporate bonds.
And with Japanese Monetary Authorities allowing yields in JGBs to rise above ifs fixed rated, JGBs could becomes more attractive.

Verdict:
A recession or hard landing validates Buffett's theory,whilst the opposite validates Bill Ackman who's argument is based inflation staying higher for longer and a soft landing of the economy from the impact of interest rate hikes.

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