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Hedge fund bets against European government bonds at two-year high

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Hedge funds have significantly increased their bets against Eurozone government bonds to the highest level seen in over two years, amid expectations that persistent inflation will limit the ECB’s ability to make further interest rate cuts this year.

The report cites data from S&P Global Markets Intelligence in revealing that the total value of short positions against European government bonds has climbed to $413bn this week, marking an 8% increase since January and the highest level seen since April 2022.

The surge in short positions occurred ahead of the ECB’s announcement of a well-signalled 0.25% point interest rate cut from a historic high of 4%. However, the ECB also raised its inflation and growth forecasts for the remainder of the year and removed an explicit easing bias from its monetary policy statement.

Eurozone inflation rose for the first time this year in May to 2.6%, with services inflation hitting a seven-month high. The ECB projects inflation to average 2.5% in 2024 and 2.2% in 2025, maintaining a target of 2%.

Market expectations are now for a shallow ECB easing cycle , with a 76% chance of another rate cut by September, down from a fully priced in cut a month ago.

German government bonds, the benchmark for the Eurozone, saw short positions rise by 10% since January to $112bn, while yields on 10-year Bunds increased from 2.1% to 2.5%, reflecting a decrease in prices.

The most significant rise in short positions has been in Italian bonds, with a 38% increase since the start of the year, suggesting waning investor confidence in a rally that had narrowed the borrowing cost gap between Italy and Germany.

Other indicators show a more optimistic outlook for European bonds, with Bank of America’s monthly fund manager survey indicating a slight overweight position relative to benchmarks.

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