Short European fixed-income trade. A loss of a lifetime?

Gassner's picture

Bill Gross, well known fixed income fund manager twittered ( and moved markets with his idea to sell German sovereign bonds short (selling without having them) to buy them back later cheaper. He called it "The Short of a lifetime"; the only issue would be the "timing"...

Interest rates will be once raising again but will short seller stay solvent long enough to benefit? The German economy is doing fine, but other EURO zone countries do not perform as well and need low interest rates for a prolonged period of time. Japan has so far not convincingly ended their easy money policy.

From an Islamic perspective debt and equity became out of balance. interest is preferred as tax deductible for corporates, and Basle regulation makes debt finance more profitable for banks than equity finance - consequently we are all overleveraged. Since this structural flaw is not tackled, neither central banks nor governments would have policy instruments to put the economy back towards a stable development. Their only next option now is to shift a bit from sovereign to corporate bonds in quantitative easing to allow for more direct economic impact.

Let's see whether there are brinks of hope, which allow to temporarily raise interest rates (e.g. a strengthening economy in the 'periphery'), but I personally think, Bill Gross, is too optimistic. Without proper economic policies to promote *equitisation*, quantitative easing is the only pain killer/medicine currently available - unfortunately addictive. Short sellers this time will run out of funds before the right policies enable them to profiteer, whoever lends to them should make sure to have sufficient collateral. In my view their only hope could be the Court of Justice of the European Union on 16th June 2015, 9.30 am - revisiting the claims challenging the legality of the Quantitative Easing program.

At least Islamic finance industry fall out will be limited: bonds and shorting of them is not allowed.