Two weeks ago in “Time To Revisit That ‘Short Of A Lifetime?’” I flagged the glaring discrepancy between German inflation (which is on the rise) and German bond yields (which are still depressed).
“I’m not entirely sure how sustainable this is,” I wrote, referencing the following chart:
Well, here’s what German bonds have done since then:
Not too bad of a call, I’d say.
Indeed on Wednesday, yields spiked to their highest levels in a year.
“In outright terms, 30y bund yields have sold off 27bp YTD moving from just over 86bp to 1.13%, leaving them trading just 8bp from the highs reached in early December,” Barclays wrote on Tuesday, before today’s 30Y sale. As it turns out, demand at Wednesday’s auction was tepid.
- Germany Sells EU0.811Bn vs EU1Bn target
- Total bids 1.11bn
- Average yield 1.2% vs 0.64% at Oct. 19 auction
- Bid-to-cover 1.4 vs 1.7 at Oct. 19 auction
- Real bid-to-cover 1.1 vs 1.4 at prior auction
- Percentage retained 18.9% vs 14.9% at prior auction
Well, sure enough, Kyle Bass was out talking about this very same trade today on Bloomberg TV. Here’s what he had to say:
Real rates in Germany are at the lowest level ever right now. Inflation in Germany is spiking. It’s not even moving in a linear fashion. You have even seen members of the ECB and the Bundesbank speak today about the fact that I think we are going to see inflation running much hotter than any of the central banks thought it would. Therefore I think the move in bonds is just beginning.
A word of advice for Kyle: if you believe that, position for it. Don’t pull a Bill Gross and effectively bet against yourself…