Jeff Gundlach’s German Bunds Short Is a Great Idea

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Jeffrey Gundlanch PhotoJeff Gundlach’s Inverse Duration Bunds Short

Jeffrey Gundlach is an investor legend. He is the mind behind Doubleline Capital, a titan in the hedge-fund industry. We have followed most of Jeff’s market calls in the last several years and we believe he has one of the best batting averages. What is interesting is that he is not just a contrarian investor for the sake of being such but he is such when the timing is right. He is as much a trader as an investor.

Jeff Gundlach recently revealed the idea to short German Bunds – the equivalent of 10 years US bonds  with 100x+ leverage. He believes that with negative yields, if one applies leverage, he/she can get a super return. What he thinks probably is that the market will play this “Inverse Duration” bonds carry and this might be the end of the bonds bubble.

Bonds have already crashed a lot in the last few days:

German Bunds Crash

Commerzbank’s head of fixed-rate strategy Christoph Rieger shared small events are creating a large crash in ever-thinner bond market. He believes the reason for the selloff are rate locking, bond supply, higher inflation in Germany and Euroarea M3 as well as risk from FOMC statement.

Not more than a week ago, another bond legend, Bill Gross also shared his negative views on the German bund and said that its a short of a lifetime.

So far the ECB is on the other side of the trade, and if we have to bet our money with someone, it will be Jeff Gundlach and Bill Gross and not the bureaucrats at Brussels. Still one must be careful was the trend was strong and its hard to fight central banks in the short-term. Zerohedge reports:

Bundesbank will face a shortage of supply as it attempts to hit its monthly purchase targets under the capital key, those selling in the secondary market will be able to demand prices commensurate with the depo rate yield floor until the entire curve converges on -0.20%:

Far from being the short of a lifetime right now, Bunds are in fact quite the opposite, and their progression to the hard -0.20% floor across the curve is just a matter of time before everyone decides to frontrun the ECB’s purchases over the next year. Because if the ECB will have no choice but to buy even more Bunds from the private market, then the sellers can demand any prices for these Bunds, up to and including the ECB’s hard (for now) floor of -0.20%! 

Once the entire German curve is trading at -0.20% then Bill Gross will be spot on, and Bunds will indeed be the short of a lifetime.

DoubleLine Capital’s head Jeffrey Gundlach  said that he is thinking about making a leveraged bet against the bunds as he wants to join against the trend and play with a group of top managers against the negative yielding bonds.

“Let’s say you leverage up the German two-year 100 times, that’s a 20 percent return,” Gundlach said. 

Note that this is precisely what we said last week:

To See Jeffrey Gundlach Macro Views Such as:

USD will continue to be strong
ECB QE will not work
Gold could rise much in 2015

Watch Jeff Gundlach Video at Wall Street Week:

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