Hedge funds exiting crowded carry trades fueled a sharp sell-off in French bonds, with positions in interest-rate swap differentials unwinding rapidly. Taula Capital Management UK LLP, Balyasny Asset Management LP and other firms had piled into these trades, which became highly unprofitable as French bond yields surged. The spread between French and German 10-year yields widened to 154 basis points on Friday, the widest since 2011.
Heavy selling was also triggered by a French government budget proposal labeled 'optimistic' by the country’s fiscal watchdog. Kaspar Hense of RBC Bluebay Asset Management noted stop-loss levels were triggered on steepener and long France trades. Marion Le Morhedec of Fidelity International said hedge fund activity likely accounts for 50% of current spread movements, amplifying market pressure.
The Bank of England previously warned that elevated hedge fund leverage in gilts increases vulnerability to synchronized strains, echoing patterns seen during the March Iran war-related market turmoil when aggressive unwinding magnified volatility. At one point, some banks refused to quote prices for French bonds due to extreme volatility.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing