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Why One Trader Is Putting On The Same Trade That Sank Bill Gross

"It’s nothing personal Bill."

"It’s nothing personal Bill."
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6 comments on “Why One Trader Is Putting On The Same Trade That Sank Bill Gross

  1. Some details about the ECB and the PSPP.

    The ECB has to buy a fixed percentage for each sovereign, determined by the so called “capital key”. The German capital key is 23.8%. For every 100€ purchased, almost 24€ had to be German bonds. As you can see the amount purchased depends on something not related to the absolute debt of the country. The ECB is bound to hold 23.8% of the whole bond amount in German bonds.
    I provide a counterexample: ECB has to hold 17% of its portfolio in Italian bonds. But that 17% held by the ECB represents 15.8% of Italian debt. In the case of Germany the 23.8% held represents 25.1% of German debt.
    Add that Germany is reducing debt (budget surplus) and is below 60% with the ratio gdp/debt. What we have is an ECB that by rule must hold 23.8% of its portfolio in bonds where the pool is shrinking.
    Extreme examples are Luxembourg, Latvia, Malta. The ECB holds 0.1% of its portfolio in bonds issued by those countries, but that 0.1% is 20.8% of Luxemboug debt, 19.5% for Latvia, and 21% for Malta.
    Excess reserves are penalized, they pay the ECB instead of receiving an interest (-0.4%). For banks is still convenient to buy bunds at 0.1% instead of paying -0.4%

    Bill focused on macro.
    Sometimes details matter.

    • Wow. What an interesting angle, Franceska! Thanks for the post.

    • yeah, but Bill surely knew all of that. there’s no way he put that trade on and kept it on without knowing how the capital key breaks down. i’m sure he’s talked about it at some point if you go back and check.

      • additionally, that setup argues for a bund tantrum at some point given that it impairs market functioning. in fact, we’ve already seen that, most notably in 2015. Bill correctly called the 2015 bund tantrum, but amusingly, he didn’t listen to himself, so he wasn’t all-in on it

  2. This bet sucks, like betting money on people flapping their arms wildly and flying for it sucks.

    But hey, it’s not my money.

  3. Harvey Cotton

    I don’t understand why anyone would make a market prop bet on an asset class that is explicitly political and in any event warped by purchases by official government entities. It is akin to betting the over/under on Soviet tractor production.

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