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Time To Short The Bund?

Submitted by Tyler Durden on 05/19/2010 15:45 -0400

Submitted by Nic Lenoir of ICAP

As I have suggested a few days ago, there are not that many reasons to want to own German Bunds yielding 2.75%. The Euro currency is dropping faster than Britney Spears' career, the yield is not exactly attractive, and the Bundesbank is one of the central banks that has been diluting its balance sheet in last week's sovereign bonds buying in Europe. Overall Bunds are not exactly a winner for long term investors it seems at these levels. Then you have the confidence inspired by a market you cannot short... 60% of the time banning short selling works all the time. Except that it never works. Yesterday's actions by Germany only highlight one thing: no one in Europe has a clue as to what do. Again we think the options are simple: dissolution of the Euro or currency debasement. But we can surely expect a lot of shenanigans before either conclusion materializes as politicians are trying to save the European dream.

If there is further currency debasement and socialisation of debt at the supra-national European level then clearly bunds should experience the sort of pressure all too familiar to PIIGS bond holders. On the other end if there is a dissolution of the Euro, or at least a partial break up with some of least financially sound countries being kicked out or walking out, the Euro should appreciate. Also in such a case we would know the German monetary views are clearly dominating the debate at the ECB, and Axel Weber will be back charging to demand rate hikes. Especially in the case of a full break-up, this would be very bearish for the Bund.

As a result we think risks are growing towards a weaker bund assuming there is not a complete meltdown of risky assets worldwide in the next few days. Yes it is asking a bit much, but as pointed out this morning AUDJPY which I will use as my barometer for the next few days held support well at 76.

Looking at technicals, we have seen almost tick for tick the 61.8% extension for the 5th Wave in Elliott today (Weekly chart). Also Weekly we are very close to the topside of the secular bullish channel. On the day we have a big reversal candle. Should we open below 127.42 the market is likely to sell off and we would consider a stop on a daily close above 127.57.

Good luck trading,

Nic

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Wed, 05/19/2010 - 15:49 | 361484 carbonmutant

From Jeff Macke at Minyanville...

"I took a trip over to the Finanzen section of Welt online, your go-to source for German financial news. While the US press is translating Chancellor Angela Merkel’s announcement as a ban on naked short-selling in specific financial instruments, that translation is limited.

Chancellor Merkel is actually saying the same thing as every regulatory body that’s ever attempted to support markets through trading restrictions. Specifically, and forgive me if my phrasing is slightly inelegant, Merkel is saying, “We realize that these assets are worthless but we’re trying to keep anyone from making money from that observation by shorting. Instead ‘patient’ longs should sell everything and ‘trading longs’ should sell everything and buy puts.”

http://www.welt.de/wirtschaft/

Wed, 05/19/2010 - 15:54 | 361497 Mitchman

i do not understand why total breakup is bearish for the Bund. Germany likely has the best balance sheet, the most competitive economy and makes some of the best products for export. If they leave, it will be because they refuse to play the funny money games that Benron has been foisting upon us. I will be most grateful if someone would explain. Thanks.

Wed, 05/19/2010 - 16:29 | 361535 SayTabserb

It all has to do with Germany's hypersensitivity to the Uberalles stuff. I lived over there for quite a while, and it's my sense that ever since WW II, Germany has been trying to prove it's a good European neighbor. It sees the exact wisdom of what you're saying, and is frustrated with the Bohemian fantasies of its neighbors, but it wants to make sure that when it leaves, it looks as though there were no other choice. But leave it will, maybe taking France along with it.

Wed, 05/19/2010 - 16:31 | 361542 Mitchman

Thank you. I do think they are going to leave and taking France would be the perfect cover. Don't know how long that arrangement would last, but it would be worth a try and maybe it would be a good wakeup call for the others.

Wed, 05/19/2010 - 17:19 | 361649 SayTabserb

Leading to a Franco-Prussian War? Love how history repeats itself.

Wed, 05/19/2010 - 20:20 | 361919 Mitchman

LOL

Wed, 05/19/2010 - 15:56 | 361501 JiangxiDad

The EU is as doomed as its currency – let's get out from under this collapsing monstrosity

http://blogs.telegraph.co.uk/news/geraldwarner/100040178/the-eu-is-as-do...

Wed, 05/19/2010 - 17:13 | 361633 izmasterzvois

Sorry, but I had to flag this piece of "euroskeptic" opinion as total junk.

Wed, 05/19/2010 - 16:14 | 361506 Bear

Are you saying ... Bund Done?

Wed, 05/19/2010 - 16:15 | 361508 Leo Kolivakis

'The Euro currency is dropping faster than Britney Spears' career"

LOL! Oops, I did it again! I bought those dips!

Wed, 05/19/2010 - 16:18 | 361517 Mitchman

Ah, Leo. You are the master!

Wed, 05/19/2010 - 16:33 | 361534 etrader

Britney at her best... :-)

That V shaped FX pattern reversal ...

http://classicfun.ws/wp-content/uploads/2009/05/britney-spears-camel-toe...

Wed, 05/19/2010 - 17:16 | 361643 Bear

Leo ... when you buy the dips, do you sell the tips?

Wed, 05/19/2010 - 16:24 | 361528 Postal

Besides the DVDs of cute girls wandering about nude, what else is there to buy in Europe?

Wed, 05/19/2010 - 17:11 | 361627 williambanzai7

Russian hookers of course!

Wed, 05/19/2010 - 17:37 | 361680 Postal

LOL Ten years ago, I would have agreed with you. Now, they have too much of that bitchy, gold-digger attitude.

Wed, 05/19/2010 - 19:11 | 361822 desgust

Maybe you don't have even hookers in the US? Too fat, too ugly? You only fuck with you old political whores? Enjoy.

Wed, 05/19/2010 - 19:54 | 361878 Postal

Nah, US girls have too much of that feminist attitude. Asian girls are the best (as long as they're not pissed off), then European girls. Most US girls are hot, I suppose, but the attitude ruins it.

Thu, 05/20/2010 - 02:49 | 362391 pak

Why buy Russian hookers in Europe? Save money and buy an air ticket to Moscow! It's not as cheap as it used to be, but still makes much sense.

Export markup in this business is almost like for heroine, not even to mention uncompetetive FX rates.

The greatest distortion, though, is for African hookers. To buy these in Europe is beyond stupid.

It's an interesting market to research. Why doesn't ZH cover it?

Wed, 05/19/2010 - 16:40 | 361553 Ignatius J Reilly

Anchorman quotes always make me laugh.

Wed, 05/19/2010 - 16:51 | 361582 dstein12

They could always throw burritos at the problem

Wed, 05/19/2010 - 16:55 | 361590 exportbank

In the above post there is something along the line of "they don't know what they're doing" - can the author site an example of someone in government on this side of the Atlantic that "knows what they're doing" (and acts on it)?

Naked Shorts and CDS along with collusion from governments helped bring us to this mess. Funny that we had to find a woman with the balls to at least fire the first shot. Last night it looked like the world would end - well, it didn't.

Wed, 05/19/2010 - 19:12 | 361824 desgust

Wed, 05/19/2010 - 17:09 | 361623 THE DORK OF CORK

I think we have to look at the true motivations of Axel Weber here.

As credit money is disappearing he wants the base money to decrease as well.

I am no economist but does the increase of base money and the decrease of credit money increase inflation ?

I am not so sure it does anymore.

I come from a small country where every political and economic interaction is incestuous - I am sure Iceland is similar.

Therefore this experiment in economics was easier to observe

What I witnessed was a explosion of credit and a epic malinvestment of resources.

The government's fiscal adventures were a sideshow in comparison and indeed the increase in government spending was to a large extent motivated by government sector workers who wanted to keep up with the Private Joneses.

So what was the fundamental reason for the collapse of the Irish domestic economy (the export sector while affected by the global recession was buffered by larger external demand)

The money loaned via the banks was "invested" in housing which did not create wealth but was a consumption sink.

The interest therefore could not be repaid as there was no real growth in the economy.

Now Weber wants to reduce the % fiscal deficit in countries - what will be the outcome of this policey.

Any Germans , French or any Europeans savings will be directed to the same dubious savings products that created the housing mess in Iberia and Ireland.

If Germany had a larger fiscal deficit rule of lets say 10% they could direct their own savings towards products and projects they may have confidence in.

Similarly the now dead banks deposits in Ireland and Iberia could be allowed to fail and their deposits directed towards their government debt via post offices not unlike the Japanese solution.

tell me what I am missing here - the private bank sector did not create much wealth in my economy so why must we sacrifice our fiscal dreams on the alter of prudence.

Then again we could just as easily kill the whole fractional reserve system and let the government print the stuff.

Thu, 05/20/2010 - 01:02 | 362307 A Man without Q...

This is a very interesting comment - it shows why the need for exponential increase in money supply collapses in the face of the impossibility of exponential economic growth. If you look at the situation in Germany, the much vaunted savings rate was merely recycled into unproductive "investment" - consumption, real estate and govts like Greece who used the money to maintain a bloated and unproductive govt sector. So, the sensible solution would be to expand public sector credit and use it to invest in real projects with real economic benefit. But the problem is, compared to the trillions in credit that fueled the housng bubble, what can Germany do? Travel around the country - the roads are damn near perfect, the trains and buses take you everywhere and are new and highly efficient, the export industry is the envy of the world, education is excellent. The problem they face is the same one as Japan - all the bridges needed are already built, so that only leaves bridges to nowhere.

Germany would be in an strong position but for the fact that the rest of the world is so screwed, so all of the money it has saved faces a haircut or dilution as its debtors fall one by one. Maybe this is part of the plan - the politicians must explain that they will suffer becuase they are net creditors and the borrowers can't pay back... but unless they find a way to forgive these debts, there will be no future demand and industry will collapse.

Thu, 05/20/2010 - 04:39 | 362434 THE DORK OF CORK

What can Germany do?......

Well there is one little thing - Germany is a huge energy importer - it can develop a capital intensive nuclear industry on the scale of France and sink its savings into something long term that does not involve recycling its savings through Iberia and elsewhere so that people can buy German goodies.

The EU does not trade energy internally to the extent it trades externally - it may always need oil but it does not need Russian Gas on the scale now required.

Of course the Russian - German relationship may have to change again.

Wed, 05/19/2010 - 17:41 | 361686 bluewarrior