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In squeezed euro debt gross sales, governments curb inflated hedge fund demand By Reuters 


© Reuters. FILE PHOTO: The euro signal is photographed in entrance of the previous head quarter of the European Central Financial institution in Frankfurt


By Yoruk Bahceli

(Reuters) – The ECB’s large bond-buying programme has fuelled a bonanza in euro zone sovereign debt, with some traders vastly overstating their orders at debt gross sales in a bid to safe the coveted paper. However now some governments are beginning to say, sufficient is sufficient.

Debtors together with the European Union, France and Spain are transferring to rein in orders from hedge funds of their syndicated bond gross sales, a authorities official and 4 banking sources concerned within the offers informed Reuters.

The goal is to stem a deluge of inflated orders from these funds, which vastly overstate their demand in an try to ensure they safe their desired quantity of bonds, in line with the sources.

“The priority is that if you do not have the proper image, you may make errors sooner or later about what the precise demand for the bonds is,” mentioned Stelios Leonidou, who manages Cyprus’s debt issuance. He informed Reuters he had raised the problem with banks, although didn’t say Cyprus deliberate to curb orders.

The investor rush to snap up sovereign debt is being partly pushed by the European Central Financial institution’s immense presence within the secondary market, the place it is 1.85 trillion-euro ($2.2 trillion) pandemic warfare chest to shore up the euro zone economic system is making it more durable for traders to search out bonds to purchase.

The likes of hedge funds and another traders wish to make a fast revenue by shopping for bonds in authorities gross sales and flipping them to the ECB for extra.

Order inflation has develop into so excessive of late that authorities debt administration workplaces are pushing again. Two bankers mentioned they’d at occasions seen hedge funds placing in orders that exceeded the totality of the belongings they managed. 

The European Union has been capping orders, primarily from hedge funds, because the starting of the 12 months and France did so in a March deal, in line with the bankers, who declined to be named as a result of sensitivity of the matter and didn’t specify what the extent of the caps have been. Spain additionally restricted such orders in February, the sources mentioned.

The technique entails having managers at banks clarify to the patrons through the sale course of that the borrower could be capping their orders, that means bids exceeding that cap wouldn’t be considered, the folks added.

“The message was: you are not going to get any profit from placing orders above a sure dimension,” mentioned one of many bankers.

A spokesperson for the European Fee mentioned it makes use of an allocation coverage consistent with EU securities legislation.

France’s debt administration workplace informed Reuters there was no particular cap on the order dimension however that banks have been instructed to make traders perceive it might be amenable to orders “extra in line” with what they might moderately anticipate to obtain.

Spain’s treasury mentioned its order cap has been in place for a number of years and that it applies “uniformly throughout classes of traders”.

The ECB declined to remark.


    Sovereign bonds are a mandatory asset for a lot of traders, which want them in portfolios to handle threat and returns. Some hedge funds and different traders additionally commerce within the bonds, making it simpler for the debt to be purchased and bought within the market.

Nevertheless the ECB’s bond-buying since 2015, which it has stepped up through the pandemic, has created an investor rush that has led to provide shortages.

Eight euros of demand chased each euro of syndicated authorities debt in January this 12 months, Reuters evaluation of Refinitiv IFR knowledge reveals, versus two euros in January 2015.

    Order books routinely exceed the funds raised by over 10 occasions; final October’s European Union 17-billion-euro challenge set a file, drawing 233 billion euros in bids. Even junk-rated Greece noticed a 26-billion-euro order e book at a current 2.5-billion-euro sale of 30-year bonds.

    For hedge funds – who’re allotted a comparatively small chunk of bonds by issuers – the supply-demand imbalance means they usually get far fewer than they ask for, so that they order greater than they want, in line with the interviews with bankers and authorities officers. 

This makes it tough for governments to gauge the true demand and may make it seem that they’ve underpriced the debt and will not be delivering worth, regardless that a lot of the demand is illusory.

Britain’s Treasury Committee wrote to its debt administration workplace in November, for instance, demanding to know the way it ensured pricing was “eager sufficient in favour of the taxpayer”.

    Consumers are “nearly incentivized to inflate their orders to get an affordable allocation”, mentioned Gareth Hill, a fund supervisor at Royal London Asset Administration.

    One hedge fund supervisor, who requested anonymity, mentioned that after inflating his order within the current Greek challenge, he acquired solely 3% of his order. “We did not get sufficient,” he added.

Anthony Requin and Maric Put up, heads of the French and Belgian debt administration workplaces, mentioned they might elevate the problem of inflated orders on the European Union’s sovereign debt sub-committee, which meets a minimum of as soon as 1 / 4.


Earlier than the ECB’s bond shopping for, hedge funds would solely bid in points if they’d a particular curiosity within the deal, one banker mentioned. “Now, it is all these gamers getting concerned systematically in each transaction”.

In January, for instance, a 50-year French bond sale noticed 75 billion euros in bids. Requin, the debt administration workplace head, estimates over 80% have been from hedge funds and different so-called relative-value accounts – traders who promote the bonds on rapidly, also called “fast-money” accounts.

The numbers have been “fully preposterous”, he mentioned. “They do not replicate something,” he added.

    The identical month, after receiving a 130-billion-euro order e book, Spain’s debt administration workplace reduce the yield it provided on its bond extra sharply than standard. Bond costs go up when yields fall.

     Over half the orders then vanished, an expertise which bankers mentioned spooked debt administration workplaces. Spain’s treasury director normal Pablo de Ramon-Laca blames it on hedge fund-type bidders who might need discovered it more durable to profitably flip the paper after the value hike. 

     Most “real-money” traders – these reminiscent of asset managers and pension funds who maintain onto bonds for an extended interval – accepted the tighter value “however a superb many fast-money accounts discovered that this lowered their revenue unbearably”, de Ramon-Laca mentioned.

At France and Spain’s most up-to-date offers in February and March, headline orders did shrink significantly.

Nonetheless, the Spanish and French bonds have been oversubscribed 13 and 5 occasions respectively. Final week’s 13 billion-euro EU deal drew practically 100 billion euros of orders.

($1 = 0.8522 euros)

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