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When To Put On Bill Gross' Big Bund Short: Citi Explains

Tyler Durden's picture




 

Since the launch of PSPP (i.e. ECB QE) on March 9, quite a bit of attention has been paid to German Bunds. Under the program, national NCBs’ share of monthly purchases is based on the ECB’s capital key and as it turns out, it’s going to quite difficult (if not impossible) for Germany to source enough purchasable assets given projected supply and Q€’s structural limitations. This has led to collapsing yields which have in turn forced the ECB and the Bundesbank to look further out in terms of maturities in order to avoid the -0.20% yield floor causing an epic flattening of the Bund curve as everything converges on the depo rate. 

For all the visual learners out there, here’s a table showing the shortage of purchasable assets in Germany…

...and as central bank purchases move further out…

...the curve flattens…

...and GC rates collapse…

This dynamic recently prompted David Einhorn to ask Mario Draghi “what he thinks a bubble in sovereign debt might look like that isn’t already evident,” and led Bill Gross to call Bunds the “short of a lifetime.” So with only six weeks (or one Graccident) to go until Bund purchases are forced out to 7-year maturities, and with traders warning that nearly every piece of PSPP-eligible German government paper will eventually trade special in repo despite the ECB’s feeble attempt to remedy the situation via its Securities Lending Program, the world wants to know: “when do I sell Bunds?” Here’s Citi with more:

Our forecast of a negative 10y Bund yield (-0.05%) mostly elicits little more than a resigned fatalism that the core bond markets are trading on technicals and not fundamentals, but the question perhaps for business survival is when do Bunds sell-off, and how can that be positioned?

 

Tactical selling opportunities


a. Nudging global recovery/inflation higher and global policy stimulus. There may currently be low correlation to economic indicators, but we do not buy the idea that global growth/inflation is completely irrelevant. For instance, on our framework on global disinflation trends, led by China, it is tactically important that the PBOC cut the RRR by 100bp this week – potentially moderating the export of deflation (see Figure 10).

 

b. Greece is fixed. There will be a component of the rally that is premised on Greek caution or hedges.  We expect Greek economic outcomes to become clearer in June and it may be tough to avoid capital controls, but once Greece is resolved, our sense is that Periphery rallies hard and Bunds weaken short term.  That resolution includes Grexit as we see little short-term contagion in markets and investors are instead left to mull over longer implications.  

 

c. ECB adapts QE to scarcity by fudging the capital key.  Why do we pick -5bp as a yield target in 10yr Bunds, and not -20bp?  There is no model but at this level we expect a conversation at the ECB council that the execution of the programme for core countries is looking more hazardous. The ECB cannot taper given the hit to credibility and what is likely to prove a material move higher in EUR FX (witness the CHF as the SNB stepped back from the currency war) and so the options are to add more asset classes (e.g. German state debt) or make the adherence to the capital key more fuzzy, where the Bundesbank still buys German bonds but shortfalls in quotas are made good by NCBs that do not face supply constraints in their own debt markets. That should be positive for periphery and a tactical sell signal on Bunds.

And as for where 10-year bunds (Bill Gross’ “Big Short”) should trade after a proper reversal…

Figure 15 shows the result of an economic regression that also includes 5y rates as an explanatory variable...

 

A correction of the excessive flattening – which accelerated in Q4-14 as ECB QE expectations built up, would put 10y Bund back to 0.75%.

And if all of the above is too much to process, here's our assessment in a nutshell:

What this means is that far from being the short of a lifetime right now, Bunds are in fact quite the opposite, and their progression to the hard -0.20% floor across the curve is just a matter of time before everyone decides to frontrun the ECB's purchases over the next year. Because if the ECB will have no choice but to buy even more Bunds from the private market, then the sellers can demand any prices for these Bunds, up to and including the ECB's hard (for now) floor of -0.20%!

 

And yes, once the entire German curve is trading at -0.20% then Bill Gross will be spot on, and Bunds will indeed be the short of a lifetime.

 

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Fri, 04/24/2015 - 14:37 | 6027179 knukles
knukles's picture

Don't
For a long long time, yet.

Fri, 04/24/2015 - 14:47 | 6027244 stocktivity
stocktivity's picture

It's all Bullshit!!!  Every day the sky is falling and every day the market is up.  The Fed is backstopping everything.  It's a rigged casino.

Fri, 04/24/2015 - 14:57 | 6027288 Headbanger
Headbanger's picture

With WHAT!?

There's no collateral and thus fucking liquidity left to backstop shit now  you mook!

Fri, 04/24/2015 - 15:13 | 6027360 PartysOver
PartysOver's picture

AS I have said a few times before, only when the banksters start to turn on each other will this cluster f*&^ end.  Not even battling algos can put a stop to this.  Until then BTFD.  PS: Banksters have extreme influence over all CB's in case you missed the memo.

Fri, 04/24/2015 - 15:15 | 6027369 farmerbraun
farmerbraun's picture

On the other side of the coin , so to speak , I have a couple of million in borrowing which rolls over this month.

As at today the interest rates on offer to me are :-

Term %pa

Floating 8.05
1 mth 7.10
3 mths 7.10
6 mths 7.09
1 yr 6.92
2 yr 6.98
3 yr 7.09
4 yr 7.27
5 yr 7.41

Yeah , kind of flat!

O.K. team Tyler . . . what's my best bet?

Fri, 04/24/2015 - 22:55 | 6028591 capital one
capital one's picture

I freelance over th? internet and earn about 80-85$ an hour. I was without a job for 7 months but last month my paycheck with big fat bonus was $15000 just working on my computer from my home for 5-6 hours. Here's what i have been doing... www.globe-report.com

Fri, 04/24/2015 - 14:40 | 6027197 buzzsaw99
buzzsaw99's picture

draghi's bazooka will be poking up gross' ass

Fri, 04/24/2015 - 14:46 | 6027240 Weaponized Innocense
Weaponized Innocense's picture

& bow

Fri, 04/24/2015 - 14:41 | 6027212 Not_FieldingMellish
Not_FieldingMellish's picture

The only thing worth shorting now is PMs... why?... because...

Fri, 04/24/2015 - 14:46 | 6027221 Dr. Engali
Dr. Engali's picture

The cost of shorting the German bund is practically nothing, but practically nothing can add up if it turns out to be a 25 year trade.  Japan anybody? BTW Bill, I don't know why in the world you would announce to God and everybody the soverign you are trying t take on, especially when it's your dinky fund VS a central bank.

Fri, 04/24/2015 - 15:07 | 6027337 venturen
venturen's picture

to put the fear of God into the morons doing this plate spinning

Fri, 04/24/2015 - 14:45 | 6027230 Weaponized Innocense
Weaponized Innocense's picture

Rolleyes

Fri, 04/24/2015 - 14:51 | 6027262 Omega_Man
Omega_Man's picture

ahhh nice work Bill.. but isn't a higher yielding bond worth more than a lower one? so it's a -.05 woth more than a .-20

Fri, 04/24/2015 - 14:53 | 6027271 Weaponized Innocense
Weaponized Innocense's picture

They upgraded the data on the Atlanta fed GDP now chart.......
https://www.frbatlanta.org/cqer/researchcq/gdpnow.aspx

Fri, 04/24/2015 - 14:59 | 6027297 Glass Seagull
Glass Seagull's picture

 

 

"Fitted"

 

LMAO

Fri, 04/24/2015 - 15:06 | 6027336 venturen
venturen's picture

can't they issue more debt to margin against the collateral of the debt they are buying so they can sell the debt to buy it back again with the printed euros from the first printed euros with the printed euros from this printing euro so they....and don't even get me started on the re-hypo from wall street to buy the debt before the debt is issued to the the first traunch of debt with the second traunch of debt....using a debt swap instrutment against the printed yuan margined against the US debt from QE printed debt! 

 

Mommy...what does a house of cards look like if you build it really...really high?

Fri, 04/24/2015 - 17:48 | 6027917 Equality 7-25-1
Equality 7-25-1's picture

So the hot ground war begins in September, Napolean?

Fri, 04/24/2015 - 20:26 | 6028283 Wild Theories
Wild Theories's picture

You don't short German bunds, silly, you buy even more if Greece exits.

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