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Alternative Market Briefing

Old Mutual bond manager introduces 'Facebunds’ and calls a turn in government bond markets

Thursday, June 14, 2012

Beverly Chandler, Opalesque London: Stewart Cowley, manager of the Old Mutual Global Strategic Bond Fund has written a strongly worded note comparing the Facebook IPO with the German government bond market, or 'Facebunds’ as he calls them.

"If regulators think the Facebook initial public offering was a scandal, they should look at the German government bond market" he writes, citing Bill Gross of PIMCO’s comment about the Facebook IPO, "I know a bubble when I see one."

Cowley writes that we can now see that Bill had a point. "At an initial valuation of nearly $105bn, each of Facebook’s 900m active users was valued at nearly $120 of annual advertising revenue. Put it another way, with revenues of $3.5bn it would take 30 years to pay off the original valuation of the company. Pretty steep you’d agree".

Cowley then advances to draw comparison with the 'absurdly valued’ Facebook and German government bonds, or bunds, saying: "What bubble hasn’t the world seen that it would merrily continue buying something that is one day a guaranteed to make a loss?"

Cowley analyses the maths behind the German bund. "Duration is a measure of a bond’s price sensitivity to yield movements. The higher the duration, the greater the price movement of a bond for any given yield. German bunds with a maturity of 30 years currently have a duration of 20 which means that for any one point movement in the yield up or down you will lose or gain 20 points of capital. This is be......................

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