Billionaire Paul Singer has a warning for his fellow investors: 1970s-style inflation can happen again, and almost nobody is ready for it.
The hedge fund manager — a frequent critic of U.S. monetary policy — said in an interview on Grant Williams’s podcast that the combination of “trillions and trillions” of dollars in Covid-19 relief spending, wage pressures and rock-bottom interest rates has the potential to shock markets. The interview was taped last week and published Friday.
“There’s a really good chance of a tremendous surprise, and a surprise in the relatively near future,” said Singer, speaking on the likelihood of consumer prices spiking higher. “Bonds could have a very significant and abrupt and intense price readjustment.”
Bond-market indicators of future inflation have risen sharply over recent months, with 10-year breakeven rates — derived from the gap between yields on inflation-linked and ordinary Treasuries — climbing above 2% to the highest since 2018. That’s up from a low of 0.47% last year at the onset of the pandemic.
Expansionary fiscal policy is helping to drive the change in outlook, even as the Federal Reserve, which holds a meeting next week, has struggled to gin up much inflation in the past decade with its own tools. It’s been promising not to apply the brakes anytime soon –- and urging politicians to hit the accelerator with more pandemic stimulus. President Joe Biden’s new administration is poised to oblige, asking Congress for another $1.9 trillion.
Singer, whose Elliott Management Corp. has one of the best track records in the hedge fund industry, said that holding longer-term bonds is “senseless” at current yields.
“No institution can meet their goals by owning those bonds. They’re no longer a hedge against equity portfolios,” he said. “When you buy something with no yield, where you can only make money if the yield goes from zero to -5 or -10, you’re engaged in speculation, you’re not engaged in investing.”
Along with inflation expectations bubbling higher, long-term government bond yields have surged, with the 10-year Treasury yield hovering near 1.09%, up 18 basis points just this year. The 30-year yield is up about 20 basis points to 1.85%.
“I’m not talking about to 15%, but a price readjustment to yields of three or four for the 30-year or the 10-year in America would cause quite a ruckus,” he said.
Since opening in 1977, Elliott — which invests across numerous strategies — has posted just two losing years and annualized gains of about 13%. The fund gained 12.7% in 2020, beating industry peers.
Singer added that the worst trade he’s ever put on was in 2008, buying Japanese inflation-linked bonds against non-inflation linked bonds. He put the trade on at an implied deflation rate of 2.5% per year.
At the bottom, after Singer had “lost more money than I thought I could possibly lose in any trade,” the notes had an implied deflation rate of 4.5%. The trade eventually swung back, he said.
This article was provided by Bloomberg News.
