From a recent interview with Bill Gross, manager of the Janus Global Unconstrained Bond fund:

Years of easing by central banks mean that interest rates in most of the developed world will fluctuate narrowly. That offers an opportunity to sell volatility to create return. If you bought a 10-year Treasury bond today and nothing changed, you would get a 1.9% yield. If you bought a seven-year German Bund, you’d get zero. If, however, you sold a three-month call or three-month put on that same Treasury with a 20-basis-point [hundredths of a percentage point] variation—in other words, the yield stayed in the range of 1.7%-2.1% for three months—the trade would produce an annual return of 6%, as opposed to 1.9%.

The risk is that interest rates will go up or down by more than 20 basis points over a three-month period. But my premise is that central bankers will do anything possible to contain interest-rate fluctuations. The sale of volatility is producing the predominant amount of return in my fund.

Our thoughts, in order:

1. Interest rates HAVE fluctuated narrowly—that is no guarantee of future performance. In fact, volatility is arguably one of the few inalienable mean-reverting things I know.

2. Selling volatility in a low-volatility world is the opposite of “The Big Short,” which was buying low-priced insurance.

3. This strategy is premised on rates moving no more than 20 bps.

4. I now know why “unconstrained” bond funds are a dangerous idea.