Betting Against Europe's Safest Bonds Costs Trader $22 Million

(Bloomberg) -- Betting against German bonds has been a punishing trade and for one investor this week’s rally just showed how much.

In the latest instance, a trader just lost nearly 20 million euros ($22 million) wagering on a drop in one of Europe’s safest assets. The position, taken via options on futures last month, was closed out Thursday after the market gained in May.

The prospect of a hit to global growth has driven demand for havens, pushing bund yields to their lowest level since 2016. Shorting German debt has been painful for investors in recent years as the European Central Bank has pumped in 2.6 trillion euros into regional bond markets. Indeed, Europe has been beset by fears of “Japanification,” a world of permanently low borrowing costs.

The bulk of the loss comes from having been short 20,000 bund call options. The options were sold for 25 euro cents on April 30 and bought back at 121 cents Thursday, equivalent to a 19.2 million euro loss, according to Eurex data and three traders familiar with the transactions.

The options trader also had a separate bearish position in bunds via a so-called put spread strategy, which has been rolled out to a longer expiry date, though the value of these has plummeted as well, said the three traders, who asked not to be named as they are not authorized to speak publicly. They said the wagers did not appear to be a hedge against a separate long bond position.

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