By now everyone has seen the infamous chart showing how much of Europe's government bond market is trading in negative territory.
This is simply a visual representation of three stunning facts:
- As of this moment 53% of all global government bonds yielding 1% or less.
- $5.3 trillion of all global government bonds currently have negative yields, of which 60% are European.
- and Central bank assets now exceed $22 trillion, a figure equivalent to the combined GDP of US & Japan.
Considering that central banks aren't going anywhere in their frenzied scramble to re-export deflation to their peers, which means trillions more in debt monetizations (until they all lose patience, or credibility, whichever comes first and start paradropping money from Bernanke's chopper) the statistics above are only going to get worse.
It is in this context that moments ago, Bill Gross said that "German 10 year Bunds are the short of a lifetime...
Gross: German 10yr Bunds = The short of a lifetime. Better than the pound in 1993. Only question is Timing / ECB QE— Janus Capital (@JanusCapital) April 21, 2015
... however with the provision that there is one open question: timing and ECB QE (also, we can only guess that Gross means 1992 not 1993 for the pound move).
Of course, that is the $5.3 trillion question.
In the meantime, here are some observations on timing and ECB QE.
As we noted over a month ago on March 6, what will first happen before Bunds are indeed "a short of a lifetime" is that they will first all hit -0.20%. They are already well on their way.
The reason? The same one we have been pounding the table on for over three years - Europe simply does not have enough unencumbered collateral for the ECB monetize, and certainly not enough to allow the ECB to continue its QE until late 2016.
And little by little everyone is figuring this out.
Today, it's Reuters' turn which write that "Debt redemptions and coupon repayments are expected to be about 30 billion euros more than the value of debt sales."
This means the ECB and national central banks (NCBs) may struggle to buy some of the bonds needed to keep the maturity of the banks' purchases in line with the average maturity of each country's eligible debt. The markets with the biggest net inflows this month are Spain, Germany and the Netherlands.
"This month's low net supply figure is not helpful to the ECB/NCB aim to minimise market distortions when carrying out QE, as there could be competing flows with investors wanting to reinvest in European government bonds," said Orlando Green, rate strategist at Credit Agricole.
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%!
Indeed, confirming that the ECB has a scarcity problem is the ECB's stern denial of just that: "ECB President Mario Draghi said last week he saw no "scarcity" problem in bond markets."
Let's revisit when the 10Yr Bund is trading at -0.20%, shall we?
Meanwhile, the only question is when the benchmark Bund finally crosses the historic 0.00% threshold. There is a brief reprieve in the coming two months...
The redemption flow in euro zone bond markets may exacerbate some of these problems in April but these difficulties may ease in the next two months. Debt sales in Italy and France in particular will outweigh debt repayments in May, Credit Agricole data shows.
... After which things get very ugly, fast:
It will be a bumpy road though -- a net 69 billion comes back to the market in July. So far under its programme, which began on March 9, the ECB has bought 73.3 billion euros of public sector bonds.
If ECB purchases are not market-neutral, investors may take the opportunity to speculate on what the central bank will buy in any given month, on the view that it will have to revert to neutrality by the end of the programme in September 2016.
Visually, the above looks as follows:
Of course, if Greece has anything to do with it, this ECB's "market neutrality" will be compromised much faster: should the Greek capital controls and bank run be exacerbated in the coming days, primarily as a result of the ECB's own ongoing attempt to spark a banking sector panic in Greece, then the 10 Year Bund may slide under 0.00% in the coming days, on its way to -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.
Just don't expect to pocket the proceeds any time soon because, paradoxically, for that to happen, central banks have to finally lose all credibility. And the fiat in which one will enjoy the profits from the Bund short may suddenly not be worth all that much in a post central-bank world.