Hedge Funds German Bonds
Hedge Funds Debate High German Bond PricesGerman bond prices have soared this year, prompting hedge fund managers to debate the wisdom of investing in a bond that offers an extremely low--even negative--yield to buyers. With debt expected to shift onto the back of the German government to alleviate the strain on other struggling European neighbors, the bonds seem overpriced. Yet with all the instability in Europe, Germany is seen as a safe bet by many and therefore the high prices are justified.
Hedge funds are split on how to bet on German bonds, in a sign that even managers supposedly at the cutting edge of finance are struggling to work out how paper offering buyers a negative yield will fare as the euro zone's debt crisis unfolds.
Germany's two-year bond yields entered negative territory in July and currently offer minus 0.037 percent, which means investors holding onto maturity would book an automatic loss.
Some managers are using bonds or derivatives to bet these sky-high prices must fall, especially if euro zone leaders try to solve the bloc's huge debt problems by pooling debt, a move that would shift more of the debt burden onto Germany.
Others say prices are justified by market uncertainty and by the chance they will be repaid in valuable Deutschmarks if the euro zone breaks up. Some also think it is worth paying Germany simply to look after their cash because of the safety it offers.
Among managers to be shorting Bunds is Patrick Armstrong, Chief Investment Officer at Armstrong Investment Managers, who thinks debt sharing and inflation will push up yields. Shorting means betting on a lower price for a security in the future.
"We still believe the Euro mess will get resolved at some point, despite the lack of follow-through on any concrete plans from politicians to date," he told Reuters. Source