The main objective of the ETF Double Short Bund Index (DSB) is to deliver twice the inverse daily performance of a 10-year German government bond portfolio by avoiding the costs associated with the use of physical bonds, while the costs related to this ETF are rather low, at around 0.2%. Assets Under Management : 1 023 €M.
To put it simply, the bonds of the developed world seem to us to be at the top of a bubble that begins 35 years ago (rates peaked around 15% in the early 1980s with inflation linked At the oil prices), with a parroxism reached in September 2016 with negative rates in some European countries (Germany, Austria, Switzerland), following the euro crisis, which is a real aberration. We consider that rates should reflect the long-term growth potential, plus inflation is 2.5% + 1% inflation, so a rate of 3.5%. We are far away despite the strong growth of these last few months, as rates reach about 0.56% for the bund at maturity 10 years.
The ECB will proceed with a subtle two-tier plan: on the one hand, the extension of the bond buyback program (QE) until the end of 2017, on the other hand the reduction in the amount purchase to 60md € per month instead of 80md€ (tapering process). Clearly, things are going in the right direction and the ECB is considering standardization for 2018, two years after the United States. Obviously, this will translate into a gradual but inevitable rise in interest rates, which will benefit banks and ultimately the economy.
We believe that the rise in interest rates (and thus the fall in bonds) will soon begin a cycle of long or very long terms, while the downside in interest rates seems very low.
DSB is a fairly straightforward way to play this long-term interest rate hike on Germany, which benefits from the lowest rates in the euro area and significant growth potential (+ 2% in 2017). Moreover, the European political cycle is now almost completed with the victory of the liberals in France and the Netherlands, while Angela Merkel seems well placed to stay in power. The ECB's latest comments suggest that there is little reason to pursue unconventional policy (EQ) on interest rates.
Standardization is inevitable, and rising rates go with it.
