Gross’s ‘Short of a Lifetime’ Sours as Bund Slump Surprises
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 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.
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. ‘‘This is a big position squeeze and unwind.’’
Gross at the end of March had sold both put and call options on futures contracts tied to 10-year US 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 US 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.”
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