Italian Credit-Default Swaps Explode, Hedge Funds Targeting France Next
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Italian credit-default swaps prices shot up today, according to data compiled by Bloomberg. The move higher signals that hedge funds are doubling down on their short Europe trades by places bets against bonds in core European countries. First they targeted Greece, now Spain and Italy. Next comes France, and eventually they will move into Germany.
The strategy being used by the hedge funds is a high-risk, high-reward trade that focuses on tail-risk, or risk that is supposed to be extremely low. Because the events these hedge funds bet on are considered unlikely, the cost to enter trades in this area is cheap, and often involves credit-default swaps, a type of insurance on debt.
"Everyone is one-way on that trade,” hedge fund manager John Paulson told investors last month, while discussing core European debt. "Being long Germany is so crowded that if there's a technical reversal you may have late entrants running for the hills."
Yields on Spanish bonds are hitting new highs today, as the market prices in fears of regional bank failures. It is widely believed that hedge funds have been active in Spain's market for years, and probably have a healthy profit. According to reports, they are now taking a closer look at France and Germany.
The strategy being used by the hedge funds is a high-risk, high-reward trade that focuses on tail-risk, or risk that is supposed to be extremely low. Because the events these hedge funds bet on are considered unlikely, the cost to enter trades in this area is cheap, and often involves credit-default swaps, a type of insurance on debt.
"Everyone is one-way on that trade,” hedge fund manager John Paulson told investors last month, while discussing core European debt. "Being long Germany is so crowded that if there's a technical reversal you may have late entrants running for the hills."
Yields on Spanish bonds are hitting new highs today, as the market prices in fears of regional bank failures. It is widely believed that hedge funds have been active in Spain's market for years, and probably have a healthy profit. According to reports, they are now taking a closer look at France and Germany.
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