We’re not obsessed with the Bond market… we swear. Well, ok, maybe a little. The blog’s chief ‘nonsense spouter’ did cut his teeth in the 30 year bond futures pit, after all, many moons ago. We may have talked about economists and Wall Street sucking at predicting interest rates, then we talked about how the average investor might not equate the market with how they hear about it on a daily basis. But that’s nothing compared to what the Bond King is calling for the “short of a lifetime”…. The Bund. And, no, we’re not talking about the disappearance of cummerbunds at weddings. We’re talking about the German Bund (the European equivalent of the US 10 year note).

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

What is a Bund anyway?

It’s important to note that just like there’s multiple government bonds the U.S. government issues, there are just as many bonds Germany issues. After a quick search on Wikipedia, you’ll see there’s the Bubills, Schätze, Bobls, Bobl/ei, Bunds and Bux, and Bund/ei.

Then there is the Euro Bund futures contract, which is what most people are talking about when it comes to market moves. The Euro Bund is a little different as the Bund also covers debt issued by Italy, France, and the Swiss Confederation. However, most people associate the Bund with Germany due to the Germans status as the largest economic power in Europe.

In the managed futures arena, Bunds have been a staple in CTA trend following portfolios since the mid 90’s when the CFTC granted a No-Action Letter which allowed US customers to trade the contract. Currently, the Bund is one of the most liquid futures contracts in the world trading almost half a million contracts per day with open interest of over 1 million contracts. In short, the Bund is an attractive market for CTAs, especially the Wintons of the world who can no longer access less liquid commodity markets for diversification.

The Bund did What?

 

So is was Gross right? Well since its yearly high at 160.24 in April, the September 2015 contract of the Euro Bund is down -6.76% {past performance is not necessarily indicative of future results}. As for the yield… it doubled (in a couple of DAYs !) back in May via Barrons.

“In a matter of a couple of days last week, the yield on benchmark 10-year German government bonds, known as Bunds, more than doubled. And from its low in the middle of last month, the yield has jumped 11-fold, making for an especially cruel April for leveraged long players.”

Euro Bund September Contract

(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Barchart

So we’re a little behind catching up on this market… but with prices continuing lower here in June and heading towards a cross over with the 100 day Moving average any moment (currently at 148), this may still be a trade worth talking about, possibly shaping up to be the defining trend following trade of 2015 as we’ve seen many managers we track get in line with this down trend by shorting this market. (Past Performance is Not Indicative of Future Results). As an aside, systematic managers don’t prognosticate on whether it is the trade of the century, they just get in line when it starts moving lower. If it turns out great, then their happy. If it doesn’t, they lose 0.10% to 2% of their equity.

100 moving average Euro Bund(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Barchart

Is Gross Full of it?

Let’s ignore for a minute that just yesterday Mr. Gross also said that the China Shenzhan Index is primed to be the short of a lifetime as well (is it possible to have multiple once in a lifetime short trades?) and focus on what exactly Mr. Gross and other heavy hitters like David Einhorn and Doug Kass see as the major issues with the German debt market. It probably doesn’t surprise you to hear that the main reason why Gross and company are recommending the big Bund short is because of Quantitative Easing, zero interest rates, Greece, and the resulting bubbles that lie underneath the surface just waiting to blow the European economy to smithereens. Stop us if you heard this before.

Short of a lifetime or B.S.?

Once last thought… despite the very bearish outlook of Wall St. and corresponding market price action it is worth keeping in mind what an old trader once told us about markets and the press… We’re paraphrasing but he said something along the lines of that by the time the market news hits the home page of the major news outlets, the smart money has definitely left the trade. Being the cover stroy isn’t what it used to be but the point remains the same. Be careful getting into well-publicized trades and remember that Wall St is a well-oiled marketing machine that usually isn’t very good at predicting things.

No matter what the Bund market does, we’ll leave you with this quote by outspoken politico, James Carville.

“I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to comeback as the bond market. You can intimidate everybody.”