The short of a lifetime, except you had to wait a lifetime
Bill Gross thinks Bunds are the short of a lifetime. Asia Unhedged doesn’t think he’ll live to see the day. One wonders whether the fabled bond manager has jumped the shark.
For the past twenty years or so, the indelible hallmark of a money manager who had reached his best-used-by-date was the short-JGB trade. Japanese yields were SO low, and Japanese debt was SO high, and the Japanese yen was SO overvalued, and Japanese pension funds are SO in need of higher yields, that Japan’s government bond market HAD to collapse.
Except it never did. Japanese bond yields just kept coming down.
In case anyone didn’t notice, Germany is in budget surplus, which means that the amount of German government debt outstanding is shrinking every year. There is a shortage of German government debt in money markets, as the Financial Times reported April 14:
Eurozone QE created risks because — unlike earlier programmes in the US and UK — it was launched when yields were already extremely low and governments were reducing fiscal deficits, restricting bond supplies. In such an environment it is harder for traders to make money, and bond owners are reluctant to sell because there is nowhere else to put their money.
“Banks are not willing participants and there are no willing sellers,” warns Steven Major, head of fixed income research at HSBC. “There could be a sellers’ strike.”
The big risk to markets is in the OPPOSITE direction. There won’t be enough German government bonds available.