REUTERS/Jim Young
- A recession will hit in the fourth quarter, Bill Gross said in a Monday tweet.
- Invest in the yield curve, SOFR futures, and equity arbitrage, he advised investors.
- Bill Ackman also closed bets made against Treasurys, amid growing economic risks.
The US will drop into a recession this quarter, as the economy is flashing signs it's cooling down, billionaire investor Bill Gross tweeted on Monday.
PIMCO's former chief investment officer based his forecast on regional bank challenges and a jump in auto loan delinquencies — in September, a record 6.11% of subprime borrowers have fallen behind on car payments in over 60 days, while vehicle repossessions have also jumped, Fitch Ratings reported.
"Regional bank carnage and recent rise in auto delinquencies to long-term historical highs indicate U.S. economy slowing significantly. Recession in 4th quarter," he tweeted.
Known to markets as the "Bond King," Gross is gearing up for the upcoming hard landing by investing in bonds throughout the Treasury yield curve.
Among Gross' portfolio additions will also be SOFR futures, or contracts on the Secured Overnight Financing Rate, a floating rate lending benchmark that resets on a regular basis.
Given that Gross views the Federal Reserve's higher-for-longer monetary policy as "yesterday's mantra," SOFR futures may provide some market safety — according to the CME Group, the contracts are often used to hedge short-term interest rate risk.
For equities, Gross outlined a focus on equity arbitrage, citing stocks such as Capri Holdings and Seagan, with both companies at the center of mergers this year. In these trades, investors may profit off of a stock's movement before and after an acquisition is made.
While Gross' arbitrage comments are similar to advice he gave at the start of the month, he previously highlighted skepticism on the Fed's ability and willingness to lower interest rates quickly.
Changing outlooks have also pushed billionaire investor Bill Ackman to adjust his investing strategy, closing short bets he had made on US Treasury bonds. After a steep slide in the price of US government debt made betting against the bonds a profitable trade, growing global risks may send investors fleeing back to safe haven trades like US Treasurys.
"There is too much risk in the world to remain short bonds at current long-term rates. The economy is slowing faster than recent data suggests," Ackman posted Monday on X.