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Morgan Stanley Joins Zero Hedge In Calling For Future Bund Weakness
Zero Hedge has long been bearish on the prospects for the German Bund, whose yields at 50-year record lows, can only go up. Couple this with German CDS which still inexplicably trades inside of the US, and the fact that the PIIGS fallout is certain to wreak fiscal and/or monetary havoc on the core of the Euro zone, or alternative a favorable resolution is sure to end the Bund flight to safety trade. We have discussed both Bund short and German CDS long positions for those readers who can establish such exposure. Yesterday afternoon, Morgan Stanley's European Interest Rate Strategist came out with a Bund short call along precisely the same fault lines that we have uncovered in Europe's shifting te(c|u)tonic lines.
Sell Bunds
On the cash bond side looking at countries like Spain and Portugal there is the risk that the market forces take over and start to push spreads wider and spread curves invert as we have seen happening in Greece. However, we think that Greece Portugal and Spain all appearing to be in trouble is a very different proposition to just Greece in trouble. In that scenario we think that core countries may start to come under pressure. A much lower-beta way of playing the current market is to short 10- year Bunds. [The chart below] shows the 10-year German benchmark, which is at 50-year lows. Germany benefits from a flight to quality bid but this may not be the case if Germany is considered the backstop of Europe. Equally if the current situation gets resolved, then Germany should lose the flight to quality bid and we should see a transfer of risk out the credit curve and we would expect to see Bund yields rise. In our outlook for 2010 we suggested that yields would be higher but that it was expensive being short and so it was important to play the range. We think this is a good opportunity to get short 10-year yields.
Sell Protection on SovX versus Germany
An alternative way to play this in CDS space is to sell protection on SovX versus Germany. [The chart below] shows the iTraxx SovX on the left hand side and the SovX weighted basket on the right hand side. We look for an entry level of 80 bp to get into this trade. This trade works well in the scenario that markets start to believe the rest of Europe will have to support other countries or it will work in the scenario where the market starts to believe in a more positive outlook for countries like Greece, Spain and Portugal.
The Bund trade is truly a no-brainer, with both a good and bad PIIGS outcome set to push yields north. And soon to be discussed on Zero Hedge - currency pegs got you down? Want to express an opinion on China but PBoC not letting you manipulate the renminbi? Don't fret - play the relative trade using China CDS. All the FX guys are doing it.
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Any ETFs hold these?
Tyler, do you have any info as to how the STUPIDS stand up agains the Greenspan-Guidotti rule?
we need a TBT for the bund,
What does antbody think of short yen,holding a pos. in YCS sx short yen and down 2 now I can hold longer
Look at:
BWX - International Treasury Bond
EWG - Germany Index Fund
I wish that Germany was the backstop of Europe.
Unfortunately I know who is.
+1 It will be the world's backstop... The Federal Reserve, AKA, the US taxpayer.
With there being so many problems in Europe, the ECB would want to keep rates low. How does this trade work if the ECB succeeds in keeping rates low or is able to keep pushing rates even lower?
Tyler:
You are dead wrong.
Germany will cut all these losers loose...
The breakup of the Euro is baked in the cake...the numbers don't work
The REAL EFFECTIVE EXCHANGE RATE in the loser countries is out of whack--overappreciated---so the Euro will disband--that's guaranteed.
and right now the game is to calculate what the DM, FFR rates will be.
With all due respect, pros, you're dead wrong. Germany will not allow the EU to breakup. Grant it they are pissed about this situation as they never wanted the smaller Mediterranean countries in the union for this exact purpose. However a breakup of the EU will do massive harm to the EU as well as the world. And before this would be allowed to happen the IMF would step in. Germany and the EU are simply making these countries suffer so that they purpose a realistic plan to get back on track. Money is coming, but so is punishment (austerity). I share your view in that "the numbers don't work" which I assume is a reference to the 16 bond markets and political structures under a unified currency, however that restructuring will occur in the distant future with steps made over time. As ZH pointed out yesterday, expect an announcement tomorrow.
TO:VERUM
"House prices in US can never go down"
...
we've heard it all before.
It is a simple analytical exercise.
Greece, Spain and Portugal, at the least, will force a breakup.
They have unsustainable imbalances which can only be corrected by a devaluation..
ask yourself...
"Is the Spanish, Greek, Portugese worker as efficient as the German?
no, they must devalue...
there's not enough money to keep them going...and a devaluation will help them.
study RER, go to the IMF site
it's a done deal...we're just watching a slow-motion wreck.
Currency pegs always fail...this is the norm
..Krugman wrote the text on Intl Macro with Obstfeld (though Roubini is far more insightful):
it's simple, as Krugman says:
In Spain, default insurance surged 16 basis points after Nobel economist Paul Krugman said that “the biggest trouble spot isn’t Greece, it’s Spain”. He blamed EMU’s one-size-fits-all monetary system, which has left the country with no defence against an adverse shock.
You can play by going long currencies like DKK, PLN, NOK, SEK, SKK versus the Euro
a profitable trade need not be held for a lifetime. sometimes a few days will do it. with the benefit of hindsight td's trade recommendation is certainly profitable.
Somebody wanted to dump his Bunds going into this.
Who you may ask? Mr. Bill Gross
Denninger got a link to a secret banker meeting in Australia. Ben may be going. Link at bottom of page.
http://market-ticker.denninger.net/archives/1940-Consumer-Credit-What-Good-News.html
speaking of secrets
From this morning`s Times
School bombing exposes Obama’s secret war inside Pakistan
http://www.timesonline.co.uk/tol/news/world/middle_east/article7017929.ece
Why a g-7 meeting in the arctic???
Controlled access. You can only fly in.
I'm on the other side. Long dollar, short euro, long bunds
Thats a very nice article on Denninger's site - its great how American ingenuity comes to the forefront. While govt refuses mark-to-market and bankers balk at forclosing, tenants skip mortgage payments. Life is just great !!!!
Yeah, and Pimpco is taking the other side of that bet. I guess the fed will have to buy the bunds back from pimpco if they lose value.
Zero Hedge has long been bearish on the prospects for the German Bund
and from memory ZH has also been bearish on the prospects for the $US (though not much mention of that in the last 3 months since the DXY has rallied).... very difficult to reconcile the two
John Williams interview Feb 6, 2010
http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2010/2/6_Jo...
Sorry guys, I don't get this.
Last year, California was unable to pay their bills. Did the US dollar break up? Did California have to introduce their own currency (by the way, how would it be called, the 'Calif'?) and devalue?
'Couple this with German CDS which still _inexplicably_ trades inside of the US.'
Have you become a part of the propaganda machine Tyler? Playing the Look ma, Europe is fucked! card over and over again will not save your broke ass country, just take the heat off from where is should be, Washington bloody corrupt DC.
Neither the US nor the Euro member states will go bankrupt. This is impossible. They will print so much money that the DOW will stand at 20.000 and CAC 40 and DAX at 10.000. Buy gold and silver and hide it from the politicians. Remember Roosevelt's gold confiscation order from 1933...
By the way, avoid big US international corporates. A strong US Dollar is going to hurt big time.
To those familiar with Elliott Waves, from the yield top in 1981 to present, it's tracing an excellent "ending diagonal" pattern. When Ending Diagonal patterns end, they quickly retrace to its starting point (i.e. the 1981 yield highs -- much lower Bund). The question is... when will the ED end or has it already ended? As we can see, it's a long term chart & the ED may/is allowed to have more downlegs which may well take quite a bit.
To know for sure, shorter-term charts will definitely be needed. But this is good catch & good starting point to ponder the charts.
Also exciting from EW perspective is if we look at dollar long-term charts, DXY over 120 is definitely in the cards in the next 5 years -- it should exceed 2001 highs (121.29). Right now it is likely in the early stages of a monster rally.
Here's one very good reason why German CDS is tighter than US.
Recent opinion polls found the majority of people were now opposed to the tax cuts that had been promised by recently elected coalition. The survey found that people thought this would either lead to cuts in essential services or result in larger deficits that would cause greater problems in the future. Wow, a country where the majority are willing to pay higher taxes in order to balance the budget....
President Obama, Bernanke, and Jim Cramer are in a MOVIE about hedge funds called "Stock Shock." Even though the movie mostly focuses on Sirius XM stock being naked-short-sold to near bankruptcy (5 cents/share), I liked it because it exposes the dark side of Wall Street and reveals some of their secrets. DVD is everywhere but cheaper at www.stockshockmovie.com