The bond market has an arbitrage opportunity on offer
As central banks in Europe, England, and Japan continue to support a low-interest rate environment and buy bonds in significant proportions, Bill Gross sees the bond market (BND) (TLT) (SHY) offering an arbitrage opportunity.
These central bankers are buying about $150 billion worth of bonds a month, and about $2 trillion dollars every year. Now, this bond buying provides tremendous support to the global bond market (BNDX) (IGOV) (ISHG), and is what is keeping the bond market afloat at present. On the other hand, the US is currently raising interest rates after having put an end to its own bond buying program some time ago.
An opportunity in divergence
The arbitrage opportunity that Gross identifies amid this divergence in monetary policy stances relates to moving from German Bunds to US Treasury or from JGBs (Japanese Government Bonds) to US Treasury.
Consider the 10-year benchmark bond, for instance. With the US Treasury offering a 245 basis point yield against the German Bund (GGOV) trading at a 45 basis point yield, you have an arbitrage opportunity right there. The difference, that is 200 basis points, even after currency adjustment, leaves at least a 50-60 basis points return when you’re moving from Bunds to Treasuries. With JGBs (JGBL) (JGBT) (JGBD) (JGBS) you could pick up a 10 to 15 basis point currency-adjusted return.
Again the risk that remains here is the 2.6% critical level for the US Treasuries, a level that Bill Gross sees as triggering a bear bond market. Read, Bill Gross: Bear Bond Market Triggered If 10-Year Treasury Yield Hits This Level.