Marion Le Mordec, Chief Investment Officer of the bond division at Fidelity International, said on the 2nd that hedge funds, which are gaining prominence in the European government bond market, are a major factor behind the recent selling of French government bonds. "In the current French market, the presence of hedge funds has become very large. Looking at fund flows, perhaps 50% of the current spread movement is due to hedge fund activity," she said. French government bond prices have plunged and yields have risen, as concerns over France's fiscal situation intensify alongside a global bond selloff, prompting investors to move funds into safer European government bonds. According to LSEG data, the spread of the French 10-year yield over Germany widened to 150 basis points on the 2nd, expanding by about 50bp over the past week, and is set to mark the largest weekly increase since November 2011. Hedge funds have become major players in the European government bond market as traditional investors such as pension funds reduce their holdings, with some estimates putting them at about half of trading activity. Le Mordec said, "I am not worried that the situation in France will descend into a crisis. But the market is trying to gauge the political situation and is warning politicians that they need to be careful in managing fiscal affairs." Regarding the possibility that the European Central Bank could support the French government bond market through its emergency TPI measure, she said, "If the ECB judges that there is a threat to financial stability, it will use whatever tools are available." However, the prevailing market view is that the likelihood of TPI being activated at this point is low, since France does not meet several of the key fiscal and deficit criteria required as conditions for support.
French 10Y yields surged and the spread over Germany widened to 150bp as hedge-fund selling and fiscal concerns drove a global bond selloff, pushing the yield up (bond price down).
