Bunds In Dollar Terms: Picture Not Quite So Pretty
Recently, economic pundits have been basking in the glow of the long Bund trade: it is the safe haven in Europe, it is the risk-free trade, etc, etc. And indeed, Bunds have been surprisingly tight in absolute spread terms, with the 10 Year German note trading well inside of its US counterpart. However, in a globalized market nothing is absolute: indeed, US investors, or any other Dollar-based managers, who have used dollars to purchase German EUR-denominated securities, are now holding on to substantial unrealized FX-based losses. In fact, as the attached chart demonstrates, the Bund alone has seen an FX-adjusted loss of 5.6% since April 30 alone. So imagine how investors in other less-than perfect Sovereign bonds have fared over the past month: in addition to seeing massive capital losses, bailout notwithstanding, they now have to contend with FX losses as well. And now that there are disclosures that either Germans or French politicians could openly pull the plug on the euro, just who will be willing to invest USD to buy EUR-denominated securities. We are confident the ECB is fully aware of the sudden drought of foreign investors for European sovereigns, which is why we believe the full and outright monetization announcement is at most days away.
And it gets worse: if banks were actually concerned about risk/return, those FX adjusted margin calls on hundreds of billions in Bund exposure would promptly commence the mother of all sell offs, especially in this "safest" of all European securities.