Bund of a Lifetime?

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).

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.”

 

 

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.