Guess now I noticed the side benefit of being long TLT. It also works as german bund and this EU news benefits the trade. Guess my mistake last year wasn't buying germand govs(I had all kinds of technical difficulties in the ETF liquidity and the futures contract size) but I should have went long TLT
I believe In 'The Invisible Hands' Leitner was discussing leveraged long US bonds as cheap(er) insurance for periods of market distress as an alternative to buying equity puts if I recall correctly.
Why exactly is this knife-catching and why exactly is it a problem for the SNB? Could you kindly explain this to me?
Buying something as it plummets is commonly referred to as knife-catching. It's exactly zero problem for the SNB (just like it was zero problem for Bill Miller to buy FNM on every single dip for 10 years) until one day it is and then Switzerland will find itself running to the IMF.
But the SNB isn't really buying EUR the ccy. As a CB, they can't sit on a pile of Euros... All the EUR they buy are used to buy short-dated EUR-denominated bonds (that's just how CBs manage their foreign ccy reserves). And, guess what, the SNB only buys German short-dated bonds. And oh have you seen those recently? You know the 2y German bond is called the Schatz (short for Bundesschatzanweisungen), right? You know what one of the meaning of the German word Schatz is? "Precious", "darling", "treasure" . And what do you think happens to their holdings of German bonds, if one day the EMU goes away? Those very bonds that they bought with them Euros.
Ah, so why do you think is this paper trading at 15bps yield, which is richer than pretty much any other short-dated govt bond on the planet (2y JGB is at arnd the same level, but then the JPY O/N rate is 20bps lower)? It also happens to be the lowest yield that this paper has ever traded at (attached).
So that's great, the SNB is the buyer of last resort for falling-in-value euros which it then trades for euro-denominated paper yielding essentially nothing and that can only fall in value from this point. Outstanding. And what happens to the SNB balance sheet/income statement if German 2-years go to 0% (yeah for the SNB) while the euro drops to $0.90 (boo)? Let's take it a step further. What if this Blocher fellow amasses more power in Switzerland, Jordan doesn't get appointed as SNB chair, and markets get a sniff the SNB may want to sell its euros (meaning it would have to unload its German paper)? Those German 2-years could plummet in value while the euro falls even more. Hello IMF. I'm not saying this will happen or even that it's more than a remote possibility, but there are no free lunches even if you're a central banker with your finger on the printing press button.