European hedge funds have started snapping up 10-year credit protection on sovereign names, including France, Germany and Portugal, which has resulted in spreads widening. One trader said his desk alone did USD1.5 billion in trades over the last several weeks--unusual in a market that could see weeks without a trade on a single sovereign name. Protection on Germany and France widened to nine basis points/13bps from 5bps/7bps two weeks ago, while protection on Portugal blew out to 16bps from 10bps. Traders said hedge funds also bought protection on Italy, Spain, Ireland and Belgium, but the core trades were on Germany and France.
"It's a macro hedge of the gloomy climate in corporate Europe," said one trader, adding that the funds do not expect the sovereigns to default. "They are expressing a view that there will be more shocks to the system in the near- to medium-term," said another trader. Governmental plans to subsidize failing companies are another reason speculators have taken positions against sovereign names, a trader said.
One trader pointed out that he typically does not trade sovereigns, but has been doing one a week for the past few weeks in blocks of USD50 million.
