Bill Gross Shorting the German 10 Year

[krazeenyc]

http://www.marketwatch.com/story/bill-gross-says-german-bund-is-short-of-a-lifetime-2015-04-21

 

With the German 10 year at an 0.1% yield I agree with Mr. Gross. How can we as individual investors get involved in this potential opportunity?

[Jurgis]

What if German 10-year goes to -0.5%?  ;)

[krazeenyc]

What if German 10-year goes to -0.5%?  ;)

 

For me? Nothing. Since you did not first share with me how to get involved in the first place. ;)

[Guest Schwab711]

What happens when the swap rate premium spikes (it is already pretty expensive)? This seems like a no-brainer but Bill is taking on significant FX and CP risk with this trade. Not really worth it to me considering the UST is 150 bps above bunds.

[TwoCitiesCapital]

http://www.marketwatch.com/story/bill-gross-says-german-bund-is-short-of-a-lifetime-2015-04-21

 

With the German 10 year at an 0.1% yield I agree with Mr. Gross. How can we as individual investors get involved in this potential opportunity?

 

Yea. I'm not quite sure it's the no-brainer that it seems to be. The ECB is buying a ton of German debt without concern for profit, and it's limitations for purchasing yields that can only be slightly negative have pushed it out on the yield curve (since German bunds were negative out to the 7-8 year point anyways). The ECB is buying EUR 60B per month and has to buy bunds out past 8 years to get to its mandated buy amount. Further, with the ECB buying more than the net expected issuance, you're going to run into a lack of supply for those entities that needs duration and government bonds regardless of the price like banks, insurance companies, and pension plans. These buyers are large and have a structural demand for these products that is largely price insensitive and they're buying in a market that has limited supply.

 

In the long-run, it's a no brainer. Yields will rise or the financial system as we know it will likely disappear. In the short term, things could go quite a bit lower with speculation, structural shortages, and large price-insensitive buyers. I wouldn't buy the bund but I wouldn't be shorting it either.

 

[krazeenyc]

I guess what I'm asking -- is there a cheap way to short the German 10 year where you can just sit on it for a long time? I have no idea on how this kind of trade would be structured and what it would cost.

[TwoCitiesCapital]

I guess what I'm asking -- is there a cheap way to short the German 10 year where you can just sit on it for a long time? I have no idea on how this kind of trade would be structured and what it would cost.

 

I don't know how you go about shorting at reasonable rates, but you could conduct a carry trade by borrowing at the lower rates (no different than shorting the rates) and invest in something with a higher yield to capture the spread.

[Jurgis]

Theoretically there are German bund ETFs (ETNs actually). Whether you can profitably short them is another question. I'm not interested enough to dig deeper, sorry.  8)

[Ian L]

I guess what I'm asking -- is there a cheap way to short the German 10 year where you can just sit on it for a long time? I have no idea on how this kind of trade would be structured and what it would cost.

 

Going short the futures on Eurex would be an efficient way to set up the trade, however you would end up having to roll the futures over up to 4 times a year, and that would depend on the price of the roll. You should wait until there is a liquid market in the roll before trading it.