A period of political calm, coupled with unexpectedly strong returns, has had hedge funds rushing to unwind their short positions in Italian government bonds in recent weeks as they look to cut their losses on bets against the heavily indebted country, according to a report by The Financial Times.

A period of political calm, coupled with unexpectedly strong returns, has had hedge funds rushing to unwind their short positions in Italian government bonds in recent weeks as they look to cut their losses on bets against the heavily indebted country, according to a report by The Financial Times.

Data from S&P Global Market Intelligence reveals that the total value of Italy’s bonds borrowed by investors to place wagers on a fall in in prices, has dropped by 40% over the past month.

Short positions hit their highest level since the global financial crisis in November last year, peaking at €46 billion amid concerns over the country’s dependence on gas imports and the election of right wing prime minister Giorgia Meloni.

But a warmer than expected winter and Rome's constructive approach to fiscal policy and a lack of any confrontation with Brussels has helped drive an ICE Bank of America index of Italian government debt up 3.4% so far in 2023 in total returns. 

The Italian economy has also benefited from a sharp drop in natural gas prices, with growth now expected to hit 1.2% this year, outpacing the ECB’s 1% growth forecast for the wider eurozone.