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Hedge Funds Bet on Big Bunds Sell-Off

Sam Jones in Monaco and Robin Wigglesworth in London

Leading hedge fund managers are betting on a significant sell-off in German government bonds in the coming months after a sharp fall in yields on the debt paper driven by a flight to safety in the eurozone.

Caspar Benson | Getty Images

More than 50 percent of managers polled at an industry conference in Monaco on Tuesday said they expect Bund yields to double within a year.

Gavyn Davies, the founder of hedge fund Fulcrum Asset Management, told the Gaim conference that every hedge fund’s analytical model was signaling that the German bond market was too expensive.

He said Bund yields were being depressed by a big “capital flight” from other eurozone countries that was “one heck of a powerful force”. However, the former Goldman Sachs chief economist said this pressure would not continue to push down yields indefinitely.

Bund yields have dropped to all-time lows this year as investors look for safe haven assets in which to place their money. The 10-year Bund yield hit a low of 1.13 percent on June 1.

However the 10-year benchmark yield climbed 33 basis points to 1.53 percent on Tuesday, as investors have begun to expect a rescue for the wider eurozone that could weigh on Berlin’s creditworthiness.

Until recently, few have dared wager against German bonds, fearing the firepower of the German government and the European Central Bank . Many now view the eurozone crisis as too far gone not to impact on Germany, however.

Among those hedge fund managers already shorting German bonds is John Paulson, the U.S. hedge fund manager who rose to prominence in 2007 thanks to correctly betting that the U.S. housing market would collapse. Bill Gross, the chief investment officer of the world’s largest bond fund, Pimco, is also bearish on the prospects for German debt.

There are “few scenarios” under which Bunds perform well Mr Gross said earlier this month.

“Bunds are attractive to short because they are at historical lows in spite of the fact that the German fiscal position can only deteriorate,” said one hedge fund manager of a large top-tier global macro firm. “It is an obvious trade if you can wait.”

Managers believe the cause of such a sell-off will be Spain’s difficulties which they expect to worsen and lead to a costly bailout.

Jamil Baz, the chief investment strategist at GLG Partners said policy makers’ tools were becoming weaker and weaker.

“The crisis has not even started,” he said, predicting that deleveraging in the eurozone could take 20 years to accomplish.

So far hedge funds have struggled to profit from the eurozone crisis. Many have been badly burnt by mistiming their bets against the euro or sovereign bonds and have been caught out by political intervention in markets. The average hedge fund manager has made just 2.5 percent this year to the end of May, according to Hedge Fund Research.