With pensions around the world increasingly reallocated funds to equity markets in a desperate effort to close funding gaps amid recklessly low central banking rates, and traditional banks tapped out by regulatory restrictions on their balance sheets, struggling Euro Zone countries are increasingly being forced to turn to hedge funds to fill their debt issuances. As Reuters points out, struggling nations like Spain, Italy, Belgium and France have seen a 3x increase in debt issuance allocations to hedge funds.
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.
Spain, Italy, Belgium and France have sought to lock in record-low borrowing rates this year with 50-year bond issues for 3-5 billion euros ($3.2-$5.3 billion). Each of them reported a historically high allocation of 13-17 percent to hedge funds.
By contrast, just three years ago, Spain, Italy and Belgium were selling only 4-7 percent of their syndicated bond sales to that community of investors, according to data from IFR, a Thomson Reuters company. There is no comparable data for France, which does not routinely record hedge funds’ allocation.
“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. “If you need to bring a large syndication to the market it is always a plus to have that community on board.”
And while hedge fund money is great so long as it’s helping to fill out primary issuance order books, the long-term volatility impacts on secondary trading could be disastrous for a region that has narrowly survived several debt crises since 2007.
He warned, however, that the tag of “fast money” still applied to hedge funds. “They have a very active investment approach, they will invest when they anticipate to make a decent short-term return. But as soon as the prospect of earnings disappears, they will leave.”
“Certainly any asset class where there is fast money being brought in that might bring added volatility and displacement of prices that aren’t real, that is unwelcome,” said Darren Ruane, head of fixed interest at Investec Wealth & Investment.
“Hedge funds could engage in yield-curve trades, say anticipating higher yields at the short end and either higher or lower yields at the long end, depending on their view of whether long-term inflation can be controlled,” he added. “When that unwinds that is really unhelpful.”
