Gross’s ‘Short of a Lifetime’ Sours as Bund Slump Surprises (1)
2015-05-07 02:10:53.844 GMT
(Updates with comments on volatility from Gross in fourth
paragraph.)
By Miles Weiss
(Bloomberg) -- Bill Gross should have listened to Bill
Gross.
Just before the selloff in German government bonds, the
manager of the Janus Global Unconstrained Bond Fund said the
debt was the “short of a lifetime.” Yet instead of betting
all-out against German bunds, Gross wagered they would trade in
a narrow range for the time being, fund holdings posted on the
website of Denver-based Janus Capital Group Inc. show.
The trade may have hurt Gross when bunds slumped more than
he had anticipated. Janus Global Unconstrained has fallen 2.6
percent since Gross advised shorting the 10-year German bund on
April 21. The losses erased the fund’s earlier gains, leaving it
down 0.04 percent for the year.
“When you sell volatility, you are basically selling
insurance,” Gross said in an April interview. And “when you
sell volatility and you get volatility, then it’s not a good
thing.”
In the interview, Gross compared his strategy to selling
insurance, saying investors were now willing to pay fatter
premiums to protect their holdings against future bond market
turbulence. This strategy positioned Janus Global Unconstrained
to boost returns with these premiums as long as volatility
remained low, but also exposed the fund to losses should markets
become more turbulent.
Bond Selloff
The holdings disclosed on the Janus website are as of March
31, and Gross may have changed them since. Erin Freeman, a
spokeswoman for Denver-based Janus, declined to comment on the
fund.
In an online commentary for the first quarter, Janus said
volatility sales, in the form of writing options contracts, were
“a major driver” of positive returns.
The downside to this strategy began to crop up the very day
that Gross proposed investors short 10-year bunds, when a
selloff in European bonds started to gather momentum. Yields on
the 10-year German government bonds, which had fallen to a
record low of 0.049 percent on April 17, surged, reaching 0.586
percent on Wednesday, the highest this year.
“The trade this year has been to be long bunds and short
the euro, said David Ader, the head of government bond strategy
at CRT Capital Group LLC. ‘‘This is a big position squeeze and
unwind.’’
11,000 Percent
Gross at the end of March had sold both put and call
options on futures contracts tied to 10-year U.S. Treasuries as
well as German bonds. Among them were puts on German bund
futures whose adjusted face value equaled about 4.6 percent of
Janus Global Unconstrained’s net assets as of March 31.
With the German bunds falling, the prices of the put
options soared. One contract that would obligate Janus Global
Unconstrained to buy futures on German bunds later this month
has jumped more than 6,000 percent since late April, and another
has surged almost 11,000 percent, according to data compiled by
Bloomberg.
Put options that Gross sold short on U.S. Treasury futures
have also jumped in price, but to a much lesser degree than
those on German bunds. One such put option on futures for 10-
year Treasuries is up more than 500 percent since April 21,
according to data compiled by Bloomberg.
Gross said in the April 29 interview with Bloomberg
Television that he hadn’t changed his positions. German 10-year
bond yields surged the most in two years that day, a jump that
surprised even Gross, who said he had expected the yields to
rise, and prices to fall, over an extended period of time.
‘‘Today wasn’t a good example for my case because prices
moved a lot,” Gross said in the interview.
“As long as they are writing checks,” Gross said,
referring to bond buying by the European Central Bank, “my best
bet, in addition to the shorting of the German bund, is to say
that things aren’t going to change much.”
For Related News and Information:
Treasuries Losses Mount as Yellen Joins Higher-Rates Chorus
Janus’s Gross Sees German 10-Year Bunds as Short of Lifetime
Top stories: TOP <GO>
--With assistance from Liz Capo McCormick, Mary Childs and Erik
Schatzker in New York.
To contact the reporter on this story:
Miles Weiss in Washington at +1-202-624-1899 or
mweiss@bloomberg.net
To contact the editors responsible for this story:
Christian Baumgaertel at +1-617-210-4624 or
cbaumgaertel@bloomberg.net
Josh Friedman
2015-05-07 02:10:53.844 GMT
(Updates with comments on volatility from Gross in fourth
paragraph.)
By Miles Weiss
(Bloomberg) -- Bill Gross should have listened to Bill
Gross.
Just before the selloff in German government bonds, the
manager of the Janus Global Unconstrained Bond Fund said the
debt was the “short of a lifetime.” Yet instead of betting
all-out against German bunds, Gross wagered they would trade in
a narrow range for the time being, fund holdings posted on the
website of Denver-based Janus Capital Group Inc. show.
The trade may have hurt Gross when bunds slumped more than
he had anticipated. Janus Global Unconstrained has fallen 2.6
percent since Gross advised shorting the 10-year German bund on
April 21. The losses erased the fund’s earlier gains, leaving it
down 0.04 percent for the year.
“When you sell volatility, you are basically selling
insurance,” Gross said in an April interview. And “when you
sell volatility and you get volatility, then it’s not a good
thing.”
In the interview, Gross compared his strategy to selling
insurance, saying investors were now willing to pay fatter
premiums to protect their holdings against future bond market
turbulence. This strategy positioned Janus Global Unconstrained
to boost returns with these premiums as long as volatility
remained low, but also exposed the fund to losses should markets
become more turbulent.
Bond Selloff
The holdings disclosed on the Janus website are as of March
31, and Gross may have changed them since. Erin Freeman, a
spokeswoman for Denver-based Janus, declined to comment on the
fund.
In an online commentary for the first quarter, Janus said
volatility sales, in the form of writing options contracts, were
“a major driver” of positive returns.
The downside to this strategy began to crop up the very day
that Gross proposed investors short 10-year bunds, when a
selloff in European bonds started to gather momentum. Yields on
the 10-year German government bonds, which had fallen to a
record low of 0.049 percent on April 17, surged, reaching 0.586
percent on Wednesday, the highest this year.
“The trade this year has been to be long bunds and short
the euro, said David Ader, the head of government bond strategy
at CRT Capital Group LLC. ‘‘This is a big position squeeze and
unwind.’’
11,000 Percent
Gross at the end of March had sold both put and call
options on futures contracts tied to 10-year U.S. Treasuries as
well as German bonds. Among them were puts on German bund
futures whose adjusted face value equaled about 4.6 percent of
Janus Global Unconstrained’s net assets as of March 31.
With the German bunds falling, the prices of the put
options soared. One contract that would obligate Janus Global
Unconstrained to buy futures on German bunds later this month
has jumped more than 6,000 percent since late April, and another
has surged almost 11,000 percent, according to data compiled by
Bloomberg.
Put options that Gross sold short on U.S. Treasury futures
have also jumped in price, but to a much lesser degree than
those on German bunds. One such put option on futures for 10-
year Treasuries is up more than 500 percent since April 21,
according to data compiled by Bloomberg.
Gross said in the April 29 interview with Bloomberg
Television that he hadn’t changed his positions. German 10-year
bond yields surged the most in two years that day, a jump that
surprised even Gross, who said he had expected the yields to
rise, and prices to fall, over an extended period of time.
‘‘Today wasn’t a good example for my case because prices
moved a lot,” Gross said in the interview.
“As long as they are writing checks,” Gross said,
referring to bond buying by the European Central Bank, “my best
bet, in addition to the shorting of the German bund, is to say
that things aren’t going to change much.”
For Related News and Information:
Treasuries Losses Mount as Yellen Joins Higher-Rates Chorus
Janus’s Gross Sees German 10-Year Bunds as Short of Lifetime
Top stories: TOP <GO>
--With assistance from Liz Capo McCormick, Mary Childs and Erik
Schatzker in New York.
To contact the reporter on this story:
Miles Weiss in Washington at +1-202-624-1899 or
mweiss@bloomberg.net
To contact the editors responsible for this story:
Christian Baumgaertel at +1-617-210-4624 or
cbaumgaertel@bloomberg.net
Josh Friedman