Gross Calls Bet Against Bund Well-Timed, Poorly ExecutedCharles Stein
Bill Gross acknowledges doing a poor job of implementing his recommendation to bet against German government bonds.
“My famous (infamous?) ‘short of a lifetime’ trade on the German bund market was well-timed but not necessarily well-executed,” Gross wrote in his June investment outlook for Janus Capital Group Inc. “Still, it was a prime example of opportunities hatched by the excess of global monetary policy.”
Gross, who runs the $1.52 billion Janus Global Unconstrained Bond Fund, advised selling short the 10-year German bund on April 21, when it yielded about 10 basis points, or 0.1 percent. Over the next month, yields climbed to 64 basis points as prices fell, vindicating Gross’s prediction. Yet his Unconstrained fund lost 2.5 percent in that period as he wagered German bunds would trade in a narrow range instead of betting all-out against the debt, data posted on Janus’s website show.
“The quickness of the move in terms of the price drop, which is 50 basis points higher in yield, was surprising to me,” Gross said in a Bloomberg Television interview Wednesday with Erik Schatzker. “It was poorly executed from the standpoint of the structure as well as the timing of the trades themselves.”
The billionaire mutual fund manager is sticking to the idea that exploiting the differences in bond yields internationally is a good way for fixed-income investors to make money in a low-return environment with few opportunities. Gross suggested there could be opportunities in favoring Treasuries over British and Spanish debt. In the Bloomberg Television interview, Gross also said he believes stock markets in the U.K. and Germany are attractive.
“Investors should want to choose the least overvalued asset to hold and the most overvalued asset to sell,” he said.
The price disparity between bunds and Treasuries also offers opportunities for arbitrage, Gross wrote in the outlook. Ten-year Treasuries recently traded at about a 175 basis point premium to 10-year bunds, far above the historical norm of 25 basis points, Gross wrote.
“A purchase of Treasuries and a sale of bunds allows for not only a potential capital gain if the spread narrows, but a yield pickup while the Rip Van Winkle investor potentially waits for a probable outcome,” he wrote.
Gross, 71, was the chief investment officer at Pacific Investment Management Co. until his sudden departure in September, when he joined Denver-based Janus. The Janus Global Unconstrained Bond Fund he manages was down 0.2 percent this year, trailing 91 percent of comparable funds, according to data from research firm Morningstar Inc. as of May 22. From when he took over on Oct. 6, the fund declined 0.7 percent, lagging behind 77 percent of peers.