Gundlach Considers 100X Leveraged Bet Against German Bunds

Tyler Durden's picture

A little over a week ago, the “old” Bond King Bill Gross called the 10-year German Bund the “short of a lifetime.” Shortly thereafter, David Einhorn challenged Mario Draghi to explain what he imagines would constitute signs of a bubble in the sovereign debt market that aren’t “already evident.” While there’s little question that the ECB has succeeded (whether through QE itself or whether by triggering a bid for EGBs from market participants intent on front-running future central bank purchases) in artificially suppressing yields across the Bund curve, we suggested that because the Bundesbank will face a shortage of supply as it attempts to hit its monthly purchase targets under the capital key, those selling in the secondary market will be able to demand prices commensurate with the depo rate yield floor until the entire curve converges on -0.20%:

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%!


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.

As discussed earlier today, the 10-year Bund sold off hard after data showed that for the first time in three years, lending by Euro-area banks to companies and households rose. That’s not good for the flight to safety trade and despite Mario Draghi’s assurances that PSPP will be implemented in full come hell or high lending, the market still fears an Q€ taper triggered by a euro area recovery and so the rout was on with yields jumping some 8 bps to their “highest” level since March 18. 

Meanwhile, the “new” Bond King Jeff Gundlach has joined his predecessor on the bond throne in calling Bunds a compelling short opportunity. Here’s Bloomberg

DoubleLine Capital’s Jeffrey Gundlach said he’s considering making an amplified bet against German bonds to join a growing group of top money managers wagering against the debt after some yields turned negative…


Since September last year, the pool of European bonds that essentially charge investors to own them has almost tripled to 2.8 trillion euros ($3.1 trillion) from 1 trillion euros, according to Bank of America Corp. data. The increase has been driven by central banks buying bonds to stimulate economies and has sent yields on German two-year notes to minus 0.273 percent, according to data compiled by Bloomberg.


Last week, Bill Gross, who ran the world’s largest bond fund until last year, called the 10-year German bund the “short of a lifetime.” Billionaire hedge fund manager Alan Howard said yesterday at the Milken conference that it’s “just crazy” to hold bonds with negative yields.

Here’s the best part: 

“Let’s say you leverage up the German two-year 100 times, that’s a 20 percent return,” Gundlach said. 

Note that this is precisely what we said last week:


That is, if German 2s yield -0.20%, shorting them produces a positive carry, which when amplified by 100 equals a 20% return.

So cheers to you Jeff, and happy trading in the new, NIRP-corrupted paranormal.

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Pool Shark's picture



That was the signal I was waiting for;

Time to buy Bunds and European Bonds...

LawsofPhysics's picture

I agree.  How many global companies do the Germans control/own now?

ZH Snob's picture

it's all cartoon commerce anyway.  why not leverage it up 1,000X?

TheCanadianAustrian's picture


Of course the premise of this article is ridiculous. Why not leverage it 100 million times and a guaranteed 20 million percent return, risk free?


1) in order to naked short with 100x leverage, you have to find someone willing to loan the bunds to you with a 1% downpayment. If you're considered a risky borrower, the risk premium on the loan will far outweigh the slight negative yield, resulting in a negative carry once again.


2) if you're going to short with stops (clothed short), then it's no longer risk free. Sure, you stand to get a 20% return on your carry, plus far greater capital gains when the German rates rise, but that doesn't change the fact that if bunds get even 1 percent more valuable, your entire position is wiped out and you're left with nothing, not even the carry.



Pool Shark's picture




The article itself points out that Draghi is having a hard time finding willing sellers of Bunds.

Good luck finding Bunds to borrow...


Thisson's picture

Ummm, a naked short is when you're selling the security without borrowing it first.  It has nothing to do with where you've set your stoploss orders.

TheCanadianAustrian's picture

Your definition is technically correct, but the end result is the same. You end up owing the shorted asset to another party, and that party needs to be compensated for the risk that you will fail to deliver.

asteroids's picture

Exactly, who is the "bond king" going to find to take the other side of the bet?

Cliff Claven Cheers's picture

Pool Shark, I agree he is either lying or he wants to be taken out on a stretcher like all others who have dared to short any government bonds anywhere in the world in the last 7 years.   Time to buy.

DeadFred's picture

100X is always a good thing

sodbuster's picture

Zero or hero- usually not much in between.

buzzsaw99's picture

excuse me but doesn't leverage cost money unless you are a friend of the fed in which case you get paid to borrow, oh, fuck it, never mind.

buzzsaw99's picture

can anyone short those german bund thingies or just rich people?

put it on my ebt

sodbuster's picture

It's a big club, if you have to ask, you probably ain't in

buzzsaw99's picture

there is probably an etf for that. it collects the .2% nirp from the ecb but it charges you a .75% fund management fee. lulz

GMadScientist's picture

BUNT (for mid-term futures). LOL.

backwardated.contrarian's picture

You don't see the big elephant?

GERMANY is short german bunds.

And quite happy about it...


GRDguy's picture

So who's going to pay the other side of that 100x bet?

Dien Bien Poo's picture

Goldman Sachs Principal Strategies.

madbraz's picture

a schmuck (a very rich one, albeit) like all the other hedge fund managers

Freddie's picture

I cannot stand most hedge fund managers but Gundlach is a pretty straight shooter like Ray Dalio, Kyle Bass and Dr. Michael Burry.

Calculus99's picture

FXCM will offer 500:1 leverage :)

Iam Yue2's picture

If it is such a certainty, then, by its very nature it is not a "bet."  Gross is being declared a hero by the muppets on Twitter, who clearly did not read the small print contained in his comment re timing amd QE.  This guy fancies a bit of the action. One is reminded of Gross On UK/US Bonds; Taleb on US Bonds; O'Neill on EUR, CHF; Stolper on everthing; Hatzius on Euro parity and the Euro falling to 82 cents in 2017.  Attention seekers one and all.

Livermore Legend's picture

".....One is reminded of Gross On UK/US Bonds; Taleb on US Bonds................ Attention seekers one and all....."


joetunn's picture

good luck covering your shorts.....

Seasmoke's picture

I am sure he will find out the answer to why Not !!!

GMadScientist's picture

And what kind of yield blip would then be required to expunge Mr. Gundlach from future global conquest?

Let's just say jawboning about betting Draghi to bankrupt you and actually doing it are two different things.

Aunty Christ's picture

20% positive carry won't help much if the Draghi moves the goal posts to... I dunno -.50%

Dien Bien Poo's picture

I cant wait to see Double Line and Gross blow up on this trade. The ECB will be solvent longer than either. You can take that to the bank.

glenlloyd's picture

The first thing you do with a good trading strategy is NOT talk about publicly.

Ward cleaver's picture

Of course he wants it public just as Soros made his bet clear, so everyone in the club can pile on for their short term gain and exit.

Counterpunch's picture
Counterpunch (not verified) Apr 29, 2015 9:23 AM

Wait just a cotton pickin'... I was told Gundlach and his hordes were defeated after the Moon Wars, and banished to the Land of Wind and Ghosts on the borders of The Dessicating Waste??!!



In any case, hedge fund managers are monkeys with dartboards. I thought it was clear by 2008 that by and large these people are obtuse twats? No?



I'm shorting the dollar. Not because I'm a genius of markets or.trends.


Just because I'm, you know.... reasonable.




AbbeBrel's picture

My brain is tooooo tiny to figure this one out. If you short a negative yielding Bond - does the Owner of the Bond (from whom you borrowed the Bond) pay YOU interest??? :-) Just kidding I realize it is just about price points.

Just in case people are watching CNBS or are otherwise distracted, the DAX is doing a cliff-dive (somebody must have thrown some Euros off the ECB cruise ship anchored at the cliff) and just hit 2.5% at the splash...

Quinvarius's picture

Proving that he is an idiot who does not understand central banks are in business to buy every stinking sovereign bond that exists and pay their governments interest for that privledge.  There is no sovereign bond market.  These bond market dinosaurs need to be currency bears, not bond bears.  How the shit do people like this get air time?

Dien Bien Poo's picture

coke snorters and pantie sniffers. like Kudlow, but with talent.

Babaloo's picture

It works great until the carry gets positiver and positiver and then your lender calls and says "hey Jeff, how 'bout coming up with some more money?"

MrSteve's picture

Gundlach didn't say he would 100X with every last pfennig in the piggy bank. I suspect if he is going 100X, it is a naked short through the futures market with a sane percentage of funds, 5-8%.

cigarEngineer's picture

Typically you want 2% of assets in any single trade; but the best-performing managers have 10 to 20 good positions, so 5-8% is actually a good ballpark figure, especially when you have super-fast computers managing the position.

Niall Of The Nine Hostages's picture

Remember how Krugman laughed at talk of bond vigilantes?

Looks like they might be finally here and ready to cash out into something that won't be utterly worthless when Putin returns to Dresden to a hero's welcome. It would explain the Chinese stock boom, anyway.

If the ECB try to stop it, we might even get the inflation we've been told we need. Either way, there's no future in bonds.

But please, feel free to buy the dip.

(My advice, all fooling aside? Buy stocks in firms that still make, drill and mine things. For as long as even the pretense of free financial markets is maintained, they'll retain their value, come what may. If the markets do shut down, it's highly unlikely your portfolio will be your biggest problem at that stage.

Call it the Old Mutual approach to investing. Proved better than nothing in "Zimbabwe" when Rhodesians had to hedge against Mugabe's destruction of what was once the soundest currency in Africa.)

Thisson's picture

My thinking is that one could invest in companies whose products will still be wanted in the event of a crash.  Like Tyson Chicken.

CarpetShag's picture

Anyone who believes these fuckers will do as they say deserves everything they get.

bnbdnb's picture

So great, they gain 20% in a year, and have no way to get out of the position.

Vin's picture

Nothing like talking about only half a trade.  What will the reverse repo rate be on those bunds?  They can go negative if the ECB buys 'em all up, ya know.