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France in 'Free Fall' as Fund Managers Short Bonds

France's poor fundamentals are not new: joblessness has soared and growth remains stunted under President Francois Hollande. However, new research shows the French public now have less faith in their economy and the European Union than the Spanish or the Italians.

In a survey conducted by Pew Research Center, 91 percent of French residents said they are negative on their economy, up 10 percentage points from the previous year.

(Read More: Eurogroup Chief: France Must Speed Up Reforms)

"No European country is becoming more dispirited and disillusioned faster than France," according to the Pew report, which describes the French mood as being in "free fall".

The French are also beginning to doubt their commitment to the euro zone, with 77 percent believing European economic integration has made things worse for France.

Asset managers and hedge funds have long been negative on French government bonds, but that trade has so far failed to produce any returns. Instead, a European Central Bank (ECB) assurance last year that it will do everything possible to keep the euro zone together has assured investors and calmed bond markets.

(Read More: Hollande One Year On: French-Bashing and 'Communism')

Credit default swaps, which allow traders to bet on the likelihood of a French default, have actually fallen in value from last year according to S&P Capital IQ, and the 10-year French government bond has rallied.

The yield on the 10-year French bond, which moves in inverse to its price, has fallen from a peak of 3.1 percent last year to just 1.94 percent, about the same level as the yield on 10-year U.S. Treasurys.

"I totally appreciate the fundamentals, but at the moment it can be like waiting for Godot. At some point you are pretty convinced that unless they can turn it around there will be a problem, but while the ECB are there as a backstop, it is a tough call to time," Andrew Mulliner, who runs a total return bond fund at Henderson Global Investors told CNBC.

(Read More: Why the Market Does Not Care About French Politics)

Still that hasn't prevented some from trying.

Last week, renowned investor, Jeffrey Gundlach, CEO and CIO of Doubleline Capital described France as a "basket case" and advised investors to short the country at the Sohn Investment Conference, a hedge fund event in New York.

Patrick Armstrong, CIO of Armstrong Investment Managers is short French bonds and has been for a number of months, describing the position as a "substantial weight in the fund."

According to financial information group Markit, the volume of French bonds out on loan has trended lower over the last year, however since October last year the number of French bonds out on loan has risen by 20 percent from $46 billion to $56 billion last week.

Loan value can indicate short-selling, however bonds can also be borrowed by institutions wanting to hold sovereign debt as collateral.

(Read More: 'Time is Running Out,' Asset Manager Tells Hollande)

"France could get into a situation that is no too dissimilar to Spain if you see the economy contract a couple of percent from where we are now," Armstrong said.

Jozsef Szabo, head of global macro at Aberdeen Asset Management said it is relatively cheap to short French government bond yields and there are good reasons for shorting it.

"A 10-15bps widening against Germany would turn this position into profit," said Szabo

"There are good reasons for shorting it: France has serious structural challenges. Its competitiveness is not great, its public sector is oversized, and its banking sector is leveraged," he said.

"Not independent of these issues, its growth potential is weakening. While peripheral countries have embarked on different programs to address similar issues, progress is limited on that front in France," he added.

By CNBC's Jenny Cosgrave;.Follow her on Twitter @jenny_cosgrave.

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