The investor behind the record $2.7 billion bond bet says the recession is just around the corner

(Bloomberg) — In June, a mystery investor made a record bet on long-dated Treasuries, sending ripples through the ETF market as trading professionals look for clues about Wall Street sentiment. Now, the firm behind that bet has come out and says its recession appeal is finally on track.

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On Tuesday, Northwestern Mutual Wealth Management’s Brent Schutte said his company poured $2.7 billion into BlackRock’s 20-year-plus Treasury bond exchange-traded fund (ticker TLT) on June 24, a unprecedented flow for the largest long bond ETF to debut. in 2002.

Schutte, the chief investment officer of the roughly $300 billion money manager, said the plan is to hold the position in retail portfolios for at least a year on the view that a shrinking labor market will trigger a recession. .

Its projection comes as a Treasury rally in recent weeks vindicates its June move. Daunting economic data and global turmoil fueled bond gains — which have eased somewhat in recent days. Still, the uproar cemented the view that the Federal Reserve will begin lowering borrowing costs next month.

“It takes longer to get into a recession because of all the excesses that have been pumped into the economy — the liquidity, the excess savings, the lower interest rate environment that has allowed corporations and consumers to refinance,” Schutte said. “You start to see those things go away.”

The labor market, he added, “is usually the last thing to break.”

Schutte pointed to a number of economic numbers that he says support his case, including the rising U.S. unemployment rate. Meanwhile, JPMorgan Chase & Co. says it now sees a 35 percent chance the U.S. economy will go into recession this year, up from 25 percent early last month.

“We’ll find out in the next 3-6 months whether or not we have one, and the reality is we may already be in one,” Schutte said of the timing of a possible recession.

The $58 billion TLT fund has gained about 1 percent since June 24, after paring its advance in recent days as a sense of relative calm returned to markets. It dipped on Thursday as fresh labor market data eased some worries about the economy.

Schutte said the ETF performed as expected and the risk-reward setup was attractive for exposure to duration, a measure of a bond’s sensitivity to interest rate movements.

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At the time TLT traded, the 10-year Treasury was yielding about 4.2% and has since fallen to about 4%. By his calculations, if rates rose 100 basis points from that June level over the roughly 12-month holding period he anticipates, he would have lost about 2%, but if they fell 100 basis points basis, it would reap about 12% total return over that time frame.

“That slant to me was attractive,” he said. “The reality is that bonds have returned to more of their historical role of hedging equity downside risk.”

Looking ahead, the investment chief expects further bouts of volatility, as seen earlier this week as investors exited carry-trade bets and as markets react to weakening economic data.

It’s unlikely, he said, that the Fed will cut rates in September by more than a quarter point because officials need to be sure inflation is moving in the right direction. At the moment, traders are preparing for a bigger discount than this amount.

However, if the labor market shows further signs of cooling, the Fed could cut by 50 basis points and “maybe even more,” Schutte said.

(Updates with details on bond yield calculation in 11th paragraph.)

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