Tudor Veteran Sees Turbulent Quarter as Inflation Hits Bonds

Updated on
  • Ten-year U.S. yields to rise 0.9% point in a year: Gillespie
  • Tightening to bite faster than Fed thinks, Gillespie says

Bond Market Headed for Sell-Off: Hedge Fund Veteran

The bond market is heading for a sell-off propelled by a rebound in U.S. inflation, according to a hedge-fund veteran placing bets that the change will be clear by December.

Brett Gillespie

Source Ellerston Capital

"Inflation is going to jump dramatically in the next year," said Brett Gillespie, who spent 11 years at Tudor Investment Corp. and is now at Ellerston Capital Ltd., where he’s building up a new global macro fund in Sydney. "Bond yields are going to go up a lot," he said in an interview at his office this week.

Economic modeling by Gillespie’s group suggests that a confluence of dynamics, from agriculture to energy, drove down the U.S. inflation rate in the middle of this year. That’s poised to change in coming months, sending six-month annualized gains in the consumer price index excluding food and energy to 3 percent, he said.

Investors may at first dismiss bigger CPI gains as being temporary, related to passing shortages caused by recent hurricanes, said Gillespie, who got his start in trading at Bankers Trust back in the early 1990s. But by the December CPI report, which comes hours before the Federal Reserve’s policy announcement on Dec. 13, it will be clear that inflation is trending higher, he says.

Gillespie’s team sees 10-year Treasury yields climbing by 90 basis points over the next year as the Fed’s shift to shrinking its balance sheet -- combined with diminished liquidity expansion abroad -- starts to bite. The notes yielded 2.33 percent as of 8:30 a.m. in New York.

"QT is going to have a much higher effect than they’re expecting," he said of the Fed’s transition to quantitative tightening from quantitative easing. "It’s that big change in the flow" of central bank asset transactions that will drive the markets, he said.

Central banks would slow their policy normalization if markets become too unsettled, though that also carries a risk of allowing inflation to accelerate further, Gillespie said. He put 30 percent odds on the Fed getting "behind the curve" in keeping a lid on inflation, a position it hasn’t been in since the late 1960s.

Gillespie uses complex foreign-exchange and fixed-income contracts to make bets on his team’s macro views, and aims to build a fund that relies equally on institutional and retail money.

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