Hedge Funds Euro Zone Bonds
Hedge Funds Bet Against Euro Zone Bonds
Hedge funds are taking bets against the bonds of Euro Zone countries like Germany and France. That these funds are taking such aggressive positions on the expectation that the safer Euro Zone countries could falter is an indicator of the growing pessimism surrounding the European debt crisis.
After a buoyant first quarter for markets, when fears over the euro zone debt crisis receded thanks to a 1-trillion-euro cash boost from the European Central Bank, hedge funds have been quick to make sure they don't miss out as concerns over the future of the single currency resurface.
Rather than bet on the likes of Greece and Spain, whose problems are now well documented, funds are shorting the bonds of core countries as a so-called 'tail hedge' - the purchase of protection against extreme events such as the launch of eurobonds, which would drive up the cost of borrowing for Germany, or even a breakup of the currency bloc.
While such bets have so far failed to pay off - rising French bond prices drove yields to their lowest since September 2010 on Friday - hedge funds are targeting core countries because liquidity is better than in peripheral markets and they feel their safe-haven status has been exaggerated as the crisis elsewhere deepens.
"There's definitely a feeling the market is getting shorter (i.e. there are more short positions)," said one fund of funds manager who asked not to be named. Source
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