Hedge funds piled into leveraged bets over the summer, figuring French politics wouldn’t get much rockier. For years, France was a popular bet for investors seeking slightly better returns than other economies. Bond yields were higher, and a deep and liquid market made it attractive for hedge funds making debt-fueled trades.
But a mix of bond volatility and French politics blew those trades out of the water this week, putting the country’s debt markets at the center of worries about whether higher borrowing costs will light a fire somewhere in the global financial system. The selling turned wild on Thursday and continued Friday, with short-term French bond yields gyrating as much as 0.40 percentage points at one point over the two days, some of the biggest moves in years.
“It’s been a slow bleed until this week, until the last two days, which suggests people were starting to get tapped on the shoulder by risk managers and told it’s time to vacate,” said Hank Calenti, fixed-income strategist at Japanese bank SMBC in London.
Foreign investors remain big holders of French government debt, which leaves the market more exposed to bad news, said Konstantin Veit, a fund manager at Pimco, the giant investment-management firm. “Hedge funds are unwinding their carry trades, of which France has been part,” he said. Also a factor, longer-term investors from Japan and elsewhere have less of a reason to hunt for returns in France now that they can now earn good money at home or in safer markets such as Germany. France’s 3.5 trillion-euro government bond market is the largest in Europe thanks to years of high deficit spending. More than half of that money, worth $3.9 trillion, is owned by foreigners, according to MUFG.
“It looks like it’s got the potential for a French government bond crisis in the making,” said Mike Bell, head of market strategy at RBC Blue Bay Asset Management. Credit-ratings firms could downgrade France, he said, and the 10-year yield difference compared with German bunds could exceed levels of the eurozone crisis if right-wing presidential candidate Marine Le Pen becomes the runaway favorite to win the presidential election next year.
Source: Wall Street Journal Markets · Summarized by HeadlinesBriefing