States sell to hedge funds

Eurozone governments are increasingly relying on hedge funds to help them meet their borrowing needs, which risks leaving them vulnerable to a debt market sell-off driven by a class of investors dubbed “fast money” for their speculative approach.

With banks playing a less active part in the sovereign debt market because of pressures on their balance sheets, several countries have turned to hedge funds to sell their targeted amount of bonds, according to data, officials and bankers.

Hedge funds tend to look for quick returns on investments, which could increase the volatility of government bond markets as they face several tests of sentiment in coming months.

Any political shocks, compounded by rising bond market volatility, could potentially trigger a sell-off - a risk that stirs painful memories of the region’s debt crisis in 2010-2012.

Hedge funds have been particularly active in the market for long-dated bonds as they offer the higher risk and reward that they traditionally seek.

Spain, Italy, Belgium and France have sought to lock in record-low borrowing rates this year with 50-year bond issues for €3bn to €5bn. Each of them reported a historically high allocation of 13% to 17% to hedge funds.

By contrast, just three years ago, Spain, Italy and Belgium were selling only 4% to 7% of their syndicated bond sales to that community of investors, according to data from IFR.

“Hedge funds have grown in importance,” said Damien Carde, head of public-sector syndication for RBS, which handles bond issues for several euro zone countries. He warned, however, that the tag of “fast money” still applied to hedge funds.

Christian Shreckeis, head of capital markets and investor relations at the Austrian Treasury, said the country’s recent 70-year bond received strong hedge fund demand.

For many governments, the fact that hedge funds can provide liquidity in the secondary bond market is also important, along with their participation in primary issues.

“We believe in having some part of the bonds sold after we complete a deal so that investors can see there is a performance in the after-market,” said Anne Leclercq, head of the Belgian government’s debt management office.

“Demand from banks was bigger in the past in general – so hedge funds are playing that role to an extent now,” she said.