Bill Gross: German Bunds Are the ‘Short of a Lifetime’

Bill Gross called 10-year German bunds the “short of a lifetime” in a tweet on Tuesday.

He expanded on that comment in an interview with Bloomberg TV, suggesting investors wait another 12 to 18 months when quantitative easing ends in the eurozone before shorting the bund.

Gross, who manages the Janus Global Unconstrained Bond Fund for Janus Investments, blamed the bund’s overvaluation on quantitative easing, but also low growth in the eurozone and problems in Greece. “If the Eurozone should strengthen in terms of growth and the need for a quantitative easing program over the next 18 months sort of diminish, or if Greece should be healed so to speak, then the bid for a […] 30-year German bund at 50 basis points would probably move higher and the price would move lower.”

He acknowledged there is an event risk to shorting the bund, but said that Mario Draghi, president of the European Central Bank, had promised not to buy anything at a yield of less than minus 20 basis points. “If he’s good to his word then even in the case of Greece, a 10-year German bund at 10 basis points would have a limit in terms of a yield of minus 20 basis points, which would be a 30 basis point move.” Gross said such a move “in a nine duration world basically would imply, well, two to three points maximum downside risk.”

Based on assurances that the ECB’s quantitative easing policy will inject €60 billion each month into the economy until September 2016, Gross said that “to think that sellers would be rushing to the exit or shorters would be jumping in the pool, so to speak, I think is a little bit of a stretch. I don’t expect that.”

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

Gross couldn’t say what the “ultimate trigger” for shorting the bund would be, but he noted that over the next five to 10 years, “it gets possible to evaluate a German bund and U.S. Treasury bond on an even basis.”

He said the expected inflation rate for the next five years will be around 1.9% in both Germany and the U.S., and the yield will be about 200 basis points lower in Germany.

“So equal the quality, yes, but 200 basis points lower in Germany. What does that say? It either says U.S. Treasuries are a whale of a buy, or it says that […] German bunds are a whale of a short. I’m suggesting if you don’t want to hedge that the best bet is to sell the bund as opposed to buy the Treasury,” he said.