How the Market Reacted to Bill Gross and His "The Short of a Lifetime" Call

Andy Waldock |

Two weeks ago we detailed the issues facing the Fed's seeming inability to get the notion of higher rates going forward through the thick skulls of the interest rate market's participants. Specifically, we referred to Janet Yellen's approach at the International Monetary Fund's meeting in Washington two weeks ago. It appears that her primary purpose was to make clear to world leaders what data she would use in determining when the US would raise interest rates. The new era of Fed transparency left the attendees in good spirits and high hopes that they were all on the same page. Until....

Bill Gross took a look at German Bund yields and announced that they were, "the short of a lifetime." 

There are a few points to be made regarding this week's action in the markets. I apologize in advance for the bullet point style.

1) When government employees speak, the audience smiles and nods politely. When Bill Gross speaks, the audience runs to their broker.

2) The chase for yield has poured money into Treasuries at ultra low rates. This will make their unwinding far more rapid than will be expected due to the magnitude of the percentage change in yields.

3) The 10-year Treasury Note's yield has risen from 1.87% to 2.19% in three weeks. That is a 17% net change in the asset's value. 

4) We stated two weeks ago in, "The Interest Rate Conundrum"  that smooth sailing would continue until someone called the first marker. It looks like Bill Gross called Germany out.

German Bund has collapsed since Bill Gross' comments.

5) We've said for quite awhile that the rally in domestic interest rates and corresponding decline in yield since the bottom of the "Taper Tantrum" of 2013 had been responsible for much of the Dollar's rally against the major foreign currencies. Has the bubble been pricked?

Will the decline in interest rate asset prices begin to make Dollars unattractive in the global currency market?

6) Once the money finally starts moving, we'll begin to grasp just how much liquidity has been added to the system.

Snapshot of QE over time provided by RJ O'Brien's Market Research Team.

7) Lastly, we have an opportunity, as a country to get right economically and remain ahead of the coming global slowdown by shrinking our balance sheet as the European Central Bank(ECB) expands theirs. Of course, the reality is that we'll shrink ours by $15 Billion and claim it as a victory heading into an election year. Meanwhile the ECB will expand theirs by $1.5 Trillion. Therefore, the global balance sheet(bubble) will continue to grow weeds for us to deal with further on down the line.

We've also posted the Chicago Mercantile Exchange's primer on interest rate trading strategies which covers rising rates in parallel as well as examples of a steepening yield curve as inflation begins to be sighted on the long end of the spectrum.

CME Group Yield Curve Strategies

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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