Analysis: oversized European bond orders decline after hedge fund crackdown
July 22 (Reuters) – European governments’ efforts to wipe out oversized hedge fund bids when selling bonds appear to be paying off, with order books for the most recent issues dropping sharply from levels seen in beginning of this year.
Reuters reported in April that huge offers for new bonds deemed inflated had become a headache for borrowers such as France, Spain and the European Union, forcing them to take measures such as cap orders. .
This came after a series of bond sales in which hedge funds regularly submitted bids far in excess of what they could reasonably expect to receive.
Their goal, according to the bankers, was to maximize the tiny allowances they receive, in order to “flip” or sell the bonds at a profit. But for debt bureaus and bankers sifting through the flow of orders, it has become increasingly difficult to assess actual levels of demand and to price bonds.
Now, several months later, order books are significantly smaller, aided by the efforts of issuers, said four bankers involved in recent transactions.
France has seen the biggest change, with the 30-year debt sale this month receiving 28 billion euros in offers, up from 75 billion euros in the 50-year deal in January.
“I think the accounts are starting to understand how we behave,” Anthony Requin, director of the French debt management office, told Reuters.
“We say (to hedge funds) that the allocation will not be determined by the size of their order. On the contrary, the larger the number, the smaller the allocation.”
Requin said that hedge funds and some other “relative value players” – investors who quickly turn over securities – made up 80% of the order book for the French syndication over 50 years in January, he estimated that the most recent transaction figure was half. this.
In total, hedge funds are now placing orders of between 50 and 500 million euros for French syndications, against more than one billion euros before the measures were taken, added Requin.
Few litigation hedge funds are important to debt sales; they add liquidity, which makes it easier to buy and sell debt in the market, and bankers say they are still heavily involved in transactions.
But problems with inflated orders worsened markedly in January and February when many hedge funds pulled out of Spanish and Italian bond deals as sovereigns cut yields on offer, with falling yield making reversals less profitable.
In their latest debt sales, books for Spanish and Italian syndications have fallen to about half of the peaks at the start of 2021.
Italy has not changed its allocation policy, but “stepped up” talks with hedge funds, asking them to submit realistic orders, Debt Management Director Davide Iacovoni said recently. Spain’s Treasury, which capped orders, did not respond to requests for comment.
“We don’t have that anymore,” said a banker involved in recent transactions, referring to the mass order cancellations.
“This is what we tried to remove, because the fact that you have had peaks and drops, in a way, you lose confidence in the process of execution,” the person said, adding that even while investors have probably inflated orders further, this no longer has an impact on execution. treat.
France’s DMO Requin said that a handful of hedge funds continue to submit very large orders despite the measures, but have received allowances on transactions far below what they would have even in absolute numbers. ‘they had heeded the directives.
The only entity that still sees huge pounds is the European Union, although it also caps hedge fund orders. Last month’s € 20 billion debt sale, the first for its pandemic stimulus fund, recorded more than € 142 billion in orders – a near-record for a single bond.
Bankers involved in EU debt said its sales still attract significant offers from hedge funds, but demand from “real money” investors – such as pension and insurance funds – has also been strong. increases. The amount he raised by selling debt was also larger than that of individual sovereigns.
European Commission spokespersons have said it does not openly communicate its allocation policy. It works on the principle that all orders can be fully allocated, they added.
Reporting by Yoruk Bahceli; edited by Sujata Rao and Toby Chopra
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