In the European Union, France is pitched as the weakest link by several investors. Not only is the economy weakening but the public is also gradually losing confidence in the French government. France’s debt situation is more dire than both Italy and Spain and this has led to a renewal of short interest in government debt.
Reuters reports that hedge funds are betting on widening bond yields as government fails to drive growth from increased government spending. France faces increasing unemployment numbers and at the same time the government’s approval ratings have fallen to all time lows. This scenario is similar to the debt positioning in Hungary where some hedge funds decided that short trades will be profitable as yields go north. Increased short activity in French bonds has been noted in the past six months. Data from Markit reports that French government bonds out on loan have increased 17 percent since last October. This would amount to bonds worth $54 billion in volume that are held in short positions.
According to our information, as of last month Woodbine Capital had tactical positions in long Finnish bonds against short French bonds. Pharo Macro Fund has a short position in French bonds against longs in Spanish and Italian bonds, which has been profitable.
Patrick Armstrong, Chief Investment Officer at Armstrong Investment Managers, said that his long held short position in 10-year French bonds is not profitable yet but it might be soon as economy weakens. The shortsellers are hedging their bearish positions in French debt against longs in German bunds. Short interest in bunds has declined 0.4 percent since October. According to Reuters’ sources, Philippe Gougenheim, CEO of Swiss-based Gougenheim Investments and Pedro de Noronha, partner at Noster Capital, both are hedging their short positions in French bonds against longs in German bonds.
Faith in the failure of President Hollande’s rescue plans for the French economy is the chief factor that is driving the short activity in France’s debt space. Experts believe that his unique approach of boosting the economy by increasing spending will crumble upon itself. Meanwhile other European economies have not been channeling any particluar confidence from investors as well. In Italy, bonds out on loans, i.e. short interest, has risen 55 percent since October 2012. While there are many hedge funds which are convinced that yields will lower in Italy and the country is following the steps of its bailout program, there are hedgers who do not believe in the low yields. As we noted earlier, in Hungary, short interest in government bonds also rose by 55 percent in between Feb 14-March 18.