Bloomberg News

DoubleLine Bet Against French Bonds to Profit From Euro Crisis

September 30, 2011

Sept. 30 (Bloomberg) -- DoubleLine Capital LP decided earlier this year that betting against French government debt was the best way to capitalize on risks that the euro-area sovereign-debt crisis would spread beyond Greece.

The firm made the wager in the summer by purchasing credit- default swaps on French debt. The cost of protecting the nation’s bonds against non-payment for five years was 177 basis points today, up from 137 in mid August.

“That has been hugely profitable,” said Jeffrey Gundlach, chief executive officer of the Los Angeles-based firm, whose $11.6 billion Total Return Bond Fund beat 99 percent of its peers in the past year handing investors a gain of 10.6 percent, according to data compiled by Bloomberg.

French financial companies had $672 billion in public and private debt in Greece, Portugal, Ireland, Italy and Spain at the end of March, the largest combined holding of the bonds of the euro-area’s troubled countries, according to the Basel, Switzerland-based Bank for International Settlements.

We realized “a crisis in Europe is going to stem from Southern European debt -- and the biggest holder of that is the French banks,” Jeffrey Sherman, a portfolio manager who helps oversee DoubleLine Capital’s $17 billion in assets, said in a telephone interview yesterday.

A basis point on a swap protecting 10 million euros ($13.6 million) of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

--With assistance from Mark McCord in London. Editors: Mark McCord, Matthew Brown

To contact the reporter on this story: Liz McCormick in New York at emccormick7@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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