Hedge funds increase their wagers against European government bonds to the highest level in two years

Hedge funds are making big bets against Eurozone government bonds, anticipating limited interest rate cuts by the European Central Bank (ECB) this year. The total value of bets against European government bonds has reached $413 billion, the highest level in over two years, according to data from S&P Global Markets Intelligence.

The rise in bets came ahead of the ECB’s decision to cut interest rates by 0.25 percentage points from a historic high of 4 percent. Despite the rate cut, the ECB raised its inflation and growth forecasts for the year and removed an explicit easing bias from its monetary policy statement.

Eurozone inflation rose to 2.6 percent in May, with services inflation reaching a seven-month high. The ECB now predicts inflation to average 2.5 percent in 2024 and 2.2 percent in 2025, with a target of 2 percent.

Christine Lagarde, president of the ECB, stated that the rate cut was due to “confidence in the path ahead,” but she did not suggest that the central bank is moving into a phase of dialing back. Markets are now pricing in a shallow easing cycle for the ECB, with a 76 percent chance of another cut by September.

Short positions on German government bonds have increased by 10 percent since January, while Italian bonds have seen a 38 percent rise in short positioning. Despite some investors losing confidence in Italian debt, other measures show optimism in the outlook for European bonds.

Some investors, like Alex Batten from Columbia Threadneedle Investments, prefer US government debt over European debt, citing the potential impact of inflation on the European economy.