The Bill Gross Effect

Since the beginning of the year, but particularly over the past month, Bill Gross and Ed Ball's brother, both of PIMCO, have been encouraging professionals to be underweight or short Gilts on the back of a hung parliament and general "the UK is history" (haven't we heard that before) story. Now this is interesting because it has not only resulted in Gilts weakening with respect to Bunds, but also resulted in a very large underperformance of the Gilt Future and its CTD.

In the below chart, the underperformance of Gilt Futures (and CTD) since mid-March can clearly be seen. Yellow line is the 10yr Gilt/Bund benchmark yield spread, the Orange line is the spread between the two CTD yields, and the White line is the ratio of the futures prices.

What is even more interesting is that in the same period, the underperformance of the CTD is marked against the curve. The below chart shows the spread of the yield on the CTD against the benchmark 10yr Gilt. Since mid march there has been an exceptionally large 13bps cheapening.

The point here is that the above evidence points to the conclusion that much of the recent weakness in the Gilt market and steepening pressure has been entirely futures led, and is thus very likely to be speculative and potentially vulnerable to a wash-out.