Bill Gross sees his short of the German bund market—which he revealed last month—as “well timed but not necessarily well executed,” according to his latest outlook letter.
The Janus Capital portfolio manager and ex-PIMCO chief announced the trade in an April 21 tweet, calling German 10-year bunds “the short of a lifetime.” As of April 30, it was the second-largest position in Gross’ unconstrained bond fund’s portfolio, Janus data showed.
Ten-year notes yielded about ten basis points when Gross publicly made the call, and did indeed fall in price while rising in yield over the next month.
In executing the play, however, Gross not only bet that yields would climb but also stipulated a narrow range in which the securities would trade.
The $1.5 billion mutual fund ended up down 2.5% over the month, Morningstar data showed, trailing its peer group which remained largely steady. Trailing total returns for the three months ending May 27 place Janus’ unconstrained product in the bottom decile (91st percentile) of comparable funds.
Still, Gross argued in his posting that the bund short “was a prime example of opportunities hatched by the excess of global monetary policy.” Central banks’ “tag team match” of zero-based policy interest rates and quantitative easing “continue to encourage malinvestment in financial assets as opposed to the real economy,” he continued.
Developed sovereign bond markets nevertheless offer arbitrage plays, Gross maintained.
“Even in this modern era of malinvestment in financial assets, investors should want to choose the least overvalued asset to hold, and the most overvalued asset to sell. For an unconstrained fund that can both buy and sell, the current opportunity is a rare one.”
The key, then, is executing on it.