Michael Burry’s big court hinges on sinking treasury bills

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Call it the Pretty Big Short.

Michael Burry, whose huge and extremely profitable bets against the housing bubble were made famous in “The Big Short”, is betting that long-term US Treasuries are going to fall.

Its Scion Asset Management held $ 280 million in put options on the iShares 20+ Year Treasury Bond ETF at the end of June, according to a regulatory filing released this week, an increase from $ 172 million three months. earlier.

Options contracts would make money if TLT, as the exchange-traded fund is called, falls as Treasury yields rise – which has not happened of late, as fear of the delta variant pushes investors towards treasury bills.

But ahead of the Federal Reserve’s annual Jackson Hole symposium, many still believe the central bank will be able to start cutting bond purchases later this year, which could prove the bears right. Traders will listen to President Jerome Powell’s clues on how much the Covid resurgence is weighing on economic growth and whether that influences when the Fed changes course.

“Every aspect of the economic data that we look at, from labor markets to inflation, all tend to look pretty healthy,” which should lead to higher yields over the next few months, said Guneet Dhingra, head of Morgan’s US interest rate strategy. Stanley. “And the fears of the delta variant have been built into the market and may have already peaked. As a potential player in the Jackson Hole offshore market, we are watching whether Fed Chairman Powell has updated his view on the delta, after not appearing particularly concerned about it so far. “

The minutes from the last Fed meeting showed that most officials saw a reduction in monthly debt purchases from year-end. Markets see Fed rates rise from Q1 2023.

The iShares ETF, which tracks T-bills with maturities over 20 years, has gained 12% since the March low while 30-year yields fell to 1.87% from 2.51% .

Morgan Stanley strategist Matthew Hornbach, known for his often-failed bold calls, told clients this month he remained confident in his recommendation to bet against 10-year Treasuries despite a swoon in yields. The firm expects the yield to end the year at 1.8%, down from 1.26% currently, with the Fed announcing a decrease in December.

It is not known if Scion has changed positions since June. A call to Scion’s office in Saratoga, Calif., Went unanswered on Friday.

In a flurry of tweets in February, Burry warned that economic reopening and economic recovery would fuel inflation, drawing a parallel between today’s US policies and those of Germany during hyperinflation in the 1920s. – the kind of situation that could encourage the Fed to increase its rates. .

Burry’s bearish bond bet is largely in line with the calls of most Wall Street strategists. The median forecast from a Bloomberg survey is for the 10-year yield at the end of the year at 1.6%, with the most bullish and bearish estimates at 1% and 2%, respectively.

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