Bill Gross just announced that he made huge bet - short on 10 yrs German bonds. Better than the pound in 1993 he said.
Two questions:
First, if he’s referencing famous Soros currency bet against Bank of England - he’s got the year wrong, it was 1992.
Second, do you agree with his reasoning for this bet?
What is his time horizon ? Seems like a bold move as yields on Bunds have been falling for a long time now and nobody is expecting a reversal anytime soon.
Yes and no.
I am overall bearish on the state of global affairs. But I hesitate to call a short opportunity. These things typically take longer than expected to manifest (it’s the most common feedback you hear about downside events from experienced PM’s) and it will take a pretty loud signal to overpower the combined global stimulus efforts. There’s this ongoing effect where each downward movement is caught by this enormous pillow of money that has nowhere to go. The fundamentals exist for a correction any day, but my gut tells me even 2016 would be early for market acceptance. A fed rate hike is one potential catalyst.
Most important to my strategy at this point is to stay nimble and stay with the market on returns (so you don’t get burnt on the sidelines) and to be cognescent of the degree of downside that exists out there so that if things really begin to slide you can be well positioned. I’ve been trading volatility and am up about 4% for the year in equities on like 7 days of actual equity market exposure, currently waiting in cash. Lately I’ve just been catching the pull backs then riding them up to within about 10 points (on the S&P) of the market’s high then getting out and waiting for things to come back to me.
Nice proposition to think of and chat with your colleagues over a pint, but it is almost impossible to pin down exactly how you could play this sensibly.
I also don’t like Bloomberg’s comparison of him with Soros - Soros traded at the back of credible signals from the market and not just propose a theory - later on of course it turned into a game of poker
Gundlach is now saying the same, so yes, it’s probably the correct strategy.
Talking their books and look what happened the last two days -10yr bund yield +20bps. Gross likely getting killed on his UST strangle though.
Since I have no idea how to get a position, I don’t care!
Have to give Bill Gross some credit here. His timing was nearly perfect. The German 10 year Bund yield was around 10bps when he made this call and is now over 80bps. Any traders gearing up on this bet will have made huge profits.
I don’t think Gross intended this to be a six week call mind. More like we have reached the end of the 30+ year bond bull supercycle and could enter a prolonged period of rising interest rates in US and Europe.
I gotta admit that this call was unbelievable.
Could be THE trade that he will be remembered for.
Does anyone know what his implementation is, here ? His exposure ?
word on the street and from his mouth is that he didn’t size it up much, if at all.
Gross’s words “On the bond side, my famous (infamous?) “Short of a lifetime” trade on the German Bund market was well timed but not necessarily well executed.”
Though this is his chart below and based on this, even with the rise in German yields, he must still see Germany yields as too low and probably has at least a small pair trade outstanding with U.S. treasuries and German bunds.
Current valuations of 10 year yields relative to each other (5/15) U.S. +50 basis points too high U.K. -50 basis points too low Germany -100 basis points too low Spain -50 basis points too low Japan Flat Australia Flat
Was it really a great call? I mean if you picked any random stranger off the street and asked him/her if a 10yr loan at 0.05% is a good idea, I bet he/she would say the same thing.
timing my friend, timing.
if you asked Joe Blow if a 10yr loan at 2% was a good idea he’d probably say no. if you asked Joe Blow in 1990 if a 10yr loan at 5% was a good idea, he’d laugh until he couldn’t breathe.
Yes but we are talking about 5bps spread here. In absolute terms when rates are 10% and someone offers 5% we might bat an eye and say too good to be true. But when someone offers 0.05% when rates are (for argument’s sake) 1%? That is a 95% discount.
I agree to a point Zero Bonus, but it’s easy to say that in hindsight.
When the USD/EUR rate got to 1.05 earlier this year, there were lots of commentators saying it would soon break parity and go to 0.90 or 0.80 even. Similarly when the oil price hit $50, I read some articles saying we’d be at $20 soon. Typical ‘new normal’ BS.
When markets have very strong momentum - as seemingly ever decreasing Euroland rates had in April - it takes some guts to bet against that. Sure you might be right in the long term, but the short term trend could wipe you out before you ever see the benefit of it.
I don´t know if it was such a great call, even considering timing. 10Y yields nearly hit Zero, and now we see a bounce in them, it wasn´t that impossible that they rise higher after such a period of declining rates.
Another point I´d consider is coincidence: did Gross see the reversal, or did he call and then yields rose? What we saw was only a great sell-off in the futures market without any trades in cash instruments. Maybe some big HFs made huge bets against Bunds, hoping for mutual funds or asset managers to join and triggering some stopp levels?
Whaaaaaat ? Now it wasn’t a great call ?
I feel like I have been observing 10Y Bunds yields loose like a couple of bips/week like… my whole life.
It has probably been the longest, most gradual movement in anything I have ever observed.
So it was a great, extremely bold call.
IMO much, much harder to call than Paulson’s call on US Subprimes in 2007 or even Soros’ call on the pound in the 90’s.
In fact, I couldn’t think of anything that is more difficult to call, maybe to the point that any call may have not much better odds than flipping a coin. But I digress.