NatWest Proposes "World's Best Trade", 10-Year Bunds Yielding a Mere 0.29%

NatWest's proposal as to what constitutes the world's best trade shows just how far the mad search for yield has gone.

It’s time to double down and add to long positions in 10-year German bunds, which offer the best risk-reward trade in the world, according to NatWest Markets Plc.

Fair value for 10-year German bond yields has halved to an estimated 0.06 percent, more than 20 basis points below current levels, according to strategists Andrew Roberts and Giles Gale. The reasons to buy remain plentiful, they wrote in a July 6 report.

Firstly, positioning: no-one is long and everyone is short. Secondly, the European Central Bank continues to support markets, offering long-term guidance as to the next policy steps. Thirdly, the amount of free float available in German securities will continue to shrink as the ECB’s asset-purchase program continues.

Dear NatWest

Let's assume as you must, there is absolutely no currency risk.

Let's also assume as you must, there is absolutely no chance the ECB does anything that surprises you.

Finally, let's assume that "no one is long" and that nothing can possibly be wrong with that thesis.

Assuming all of that, your gain to fair value is a bit "more than 20 basis points".

Heck. I will be generous and call it 25 basis points.

Is a quarter of a percent really the best you can do in terms of risk-reward?

By any chance did you up the ante with leverage?

If you are counting on capital gains to boost the return, then let me ask what happens if your currency risk assumption misses the mark?

The mad search for yield turns up strange proposals. This was another one.

Mike "Mish" Shedlock

Comments
No. 1-6
hmk
hmk

I was kidding about the sure thing

MorrisWR
MorrisWR

If the assumptions are correct. I'll stick with options for profit and Treasuries for my bonds. Maybe it pays off but I am wary of anything financially related to the EU at this time.

Tengen
Tengen

I'm more than happy if the cheap money starts flowing into German bonds. At least it's not being used to bid housing prices even further into the ionosphere.

hmk
hmk

I think if you are holding a ten year at .29% and the yield drop to .06% your percentage gain on the sale is much more than a quarter point. I don't know how to calculate the profit on this exactly. Also those guys probably want to lever up. Sounds like a sure thing non the less.

Rayner-Hilles
Rayner-Hilles

lol: my bank.

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