Bill Gross: German Bunds Is 'The Short Of A Lifetime'

With the ECB quantitative easing in place to turn around the eurozone, some economies are witnessing reversals. However, there are also other euro-member economies that didn't required the quantitative easing in the first place and now might be investing overvaluation of assets.

"Bond King" and Janus Capital Group Inc JNS portfolio manager Bill Gross was on Bloomberg TV recently to discuss why the German bunds might be overvalued and his short trade on them.

Shorting The German Bund

When asked when a good time to short the bund would be, Gross said, "Well most investors [...] would probably want to wait for 12 to 18 months, because that's when the eurozone and the ECB's quantitative easing program ends," Gross said.

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"And one of the reasons for the overvaluation of bunds has to do with Mario Draghi and his program of €60 billion a month in terms of buying power. And so you don't want to fight the Fed or the ECB, I suppose. And then getting in early is doing that to a certain extent.

"I would say that the overvaluation is due to a number of things. One, it's due to the low growth of the eurozone. Two, it's due to the quantitative easing program. And three, it's due to Greece."

He continued, "And if any of these should change direction, 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 German bund, a 10-year German bund at 10 basis points – or let's go this way, 30-year German bund at 50 basis points – would probably move higher, and the price would move lower."

Event Risk

Gross was asked if there is an event risk attached to his trade. He replied, "I think there is. To a certain extent, it's alleviated by the fact that Draghi has promised us, and hopefully his promises are good on either side, but he has promised us he would not buy anything at a yield of less than minus 20 basis points.

Related Link: High-Yield Bond ETFs Grapple Higher

"And so if that's true, if he's good to his word, then even in the case of Greece, then a 10-year German bund at 10 basis points would have a limit in terms of a yield of a minus 20 basis points, which would be a 30 basis point move, which in a nine-duration world basically would imply, well, two to three points maximum downside risk.

"So I think Draghi has told us that he's going to buy some, but he's not going to get ridiculous," Gross concluded.