A little over a week ago, the “old” Bond King Bill Gross called the 10-year German Bund the “short of a lifetime. [14]” Shortly thereafter, David Einhorn challenged [15] 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 [16] 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 [17]:
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:
Gross is smart: when you short negative yielding bonds you have a positive carry
— zerohedge (@zerohedge) April 23, 2015 [18]
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.
