Only this much profit on "the short of a lifetime."

Photographer: Andrew Harrer/Bloomberg

ECB Failure Ruins 'Short of a Lifetime'

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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In April, Bill Gross said betting on a decline in the value of German government debt offered the trade of a "lifetime." Thus far, the strategy has failed to deliver anything like the stellar profits anticipated by Gross. But that says less about the market acumen of the world's best-known bond investor than it does about quantitative easing's failure to extinguish the threat of deflation in the euro zone.

Here's what Gross, formerly of Pimco and currently managing money at Janus Capital, tweeted on April 21:

The comparison he used to quantify the scale of the opportunity was the British pound's 1992 departure (ignore that he got the year wrong) from the pre-euro currency-pegging system called the Exchange Rate Mechanism. That netted $1 billion for George Soros and Stanley Druckenmiller, as the pound lost 14 percent of its value against the deutsche mark in three weeks.

When Gross sent his tweet, the then benchmark German 10-year bond was trading at about 103.26. In the following weeks, it dropped to as low as 95.59, marking a 7.4 percent decline. But since then it's drifted back up, and was recently at about 100.85, down a measly 2.3 percent from when Gross first recommended the transaction:

Source: Bloomberg

The initial success of Gross's trading suggestion reflected market expectations that the European Central Bank's QE program would be a success. By buying 60 billion euros ($64 billion) of bonds each month, the speculation went, the central bank would pump enough money into the economy to stimulate growth and start inflation on the path back toward the central bank's 2 percent target. The ECB’s own calculations suggested the program would add 0.4 percentage point to inflation in 2015 and 0.3 percentage point in 2016.

QuickTake Europe's QE Quandary

Instead, consumer prices rose just 0.1 percent in October; the average change this year in the consumer price index is zero. A staggering $2 trillion of euro-denominated debt now offers negative yields -- meaning investors are paying for the privilege of keeping their money in the relative safety of government bonds. They wouldn't be willing to do that if they had any inkling that future inflation would erode the value of their money.

On Friday, Draghi pledged to "do what we must to raise inflation as quickly as possible." That suggests further rate cuts and an expanded bond-buying program might be on the cards when the ECB next meets on Dec. 3. Unfortunately for Gross's trade, though, the experience of recent months suggests even that won't be enough to drive bond yields higher and prices lower. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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