According to eFinancialCareers, the plunge in French government bonds is impacting London-based macro hedge funds, with the number of people leaving their European interest rate trading positions rising from approximately 75 to nearly 100 in recent weeks. Some funds have long profited by using French government bonds as collateral in the repurchase market, leveraging their positions to earn the spread between bond yields and financing costs. However, as fiscal and political risks in France escalate, the decline in bond prices has triggered stop-loss orders and concentrated deleveraging.
Goldman Sachs data shows that the French government bond yield relative to the German government bond strategy basket has fallen from approximately 104.3 in February to 99.2, erasing about five years of accumulated gains. Fidelity International estimates that hedge fund trading may explain about half of the recent volatility in the Franco-German interest rate spread; Allianz Trade stated that market depth is more than 50% lower than normal. On October 22, the yield on 10-year French government bonds touched 5%, and the Franco-German interest rate spread approached 160 basis points. Market concerns about tightening financing conditions for French government bonds as repurchase collateral have further amplified the sell-off and transmitted it to Italian government bonds. The actual scale of losses for related funds has not yet been disclosed.
