Why we are still shorting German bunds (Neuberger)

Jon Jonsson, manager of the Neuberger Berman Global Bond Absolute Return Fund, is retaining his short position on German bunds.

While the yields on German government bonds have backed up significantly since the lows in April, a trade Jonsson was positioned for and strongly profited from, the manager does not believe the pressure is at an end.

“It is difficult to make shortterm calls in this market – as price action has been dominated by technicals, momentum and dislocations created by central banks,” Jonsson says. “However, I remain confident bund valuations are massively overpriced and I am looking to exploit this against less dislocated markets and wait for the valuation anomalies to reverse.” Jonsson is currently looking to exploit spreads between US and German 30-year bonds.

The manager initiated the position when the yield spread was about 175 basis points, but this has since moved tighter into about 150bp. “The growth differential between the US and Germany still implied by this spread is simply not sustainable over a long period of time,” Jonsson explains.

“You can go back over many years and never find when spread levels have been so wide between the US and Germany. “Even during the tech bubble, when the US was the seen as the king of economic growth, spreads between the markets never got anywhere near 100bp. Even spreads in the booming period before the financial crisis only reached about 100bp.

“I am not sure if this trade will make us a lot more money over the next 12 months, but I am sure over two or three years we will be rewarded.”