Bill’s “Short of a Lifetime”

According to Bill Gross “German 10yr Bunds = The short of a lifetime.” We just wanted to make it clear that the Bunds were perfectly co-moving with the Global Carry over the last six years and the Global Carry is the major source of returns behind US equities, bonds, the Risk Parity portfolios, and 60/40 for that matter.

Global Carry, Yen and Dollar are irrefragable drivers of Global Macro. Since the end of the Global Financial Crisis (GFC) the equities and bonds are just derivatives of these factors. We reviewed our Global Macro Framework in details recentlyand here would simply focus on the Global Carry factor stories.

There are two simple proxies for the Global Carry. First, the simplest one is SPX + 10y Note futures:

Its magical performance is attributed to the cancelation of the Yen factor sensitivity (a.k.a. Risk On/Off behavior) between equities and bonds. Still it has some residual short dollar sensitivity coming from equities which led to recent relative underperformance.

 1Dynamika Commentary, “Global Macro Framework”, 11 March 2015

Even better proxy for the Global Carry is the short Dollar exposure hedged version. It is comprised of SPX + two 5y Note + Dollar Index futures:

Fast-forward to German bonds. The Bund (10y German bond) was pretty much co-moving with the Global Carry since the GFC. Here is the Bund (red) recent performance (hedged for euro currency) vs the Global Carry (green):

While there appears to be a bit of leverage in the Global Carry kinks it is pretty much co-moving with the Bund on all the ups and downs especially during the Taper Tantrum (the left one third of the chart).

So can there be decoupling now? Can one go short Bunds without shorting the Global Carry? And can one short the Global Carry without asking for trouble for the global capital markets?

To twist the knife, let us look at how the Global Carry performed prior to 2009. Here is the chart for the first proxy

And here is the chart for the second proxy

Is this QE driven? Or rather, are there are any doubts regarding this?

What will happen after a rate hike?


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