Investors Seeking Political Hedge in France, Italy Buy Futures

  • Open interest in bond futures rises to highest since 2012
  • Italian bond futures being used as hedge on French risk

AB's Loughney Sees French Markets Focused on Uncertainty

Investors aren’t taking chances on their French and Italian government bond holdings.

Open interest in the two nations’ active bond futures contracts, a measure of the total number of active bets, rose to the highest this week since at least 2012. That suggests investors concerned about the growing voices of populism around the world are seeking a hedge against their holdings in a year of European elections.

In France, while most polls suggest the euro skeptic Marine Le Pen wouldn’t win a second round against mainstream opponents, scandals rattling former front-runner Francois Fillon have led to a bond selloff. In Italy, a failed referendum and a constitutional ruling on voting raised the likelihood of an early election this year.

  • Italian bond futures are also being used as a hedge for French election risk because of their high liquidity and as a Le Pen victory could be negative for the euro area, traders say. Positioning in Italian futures is very short, says a trader in London
  • The importance of bond futures markets has increased as central bank interventions reduce liquidity in traditional cash bonds, according to DZ Bank AG fixed-income strategist Christian Lenk
  • An increase in open interest also reflects a higher level of medium and long-term hedging activity, with investors looking to safeguard against risks including interest-rate rises and changing euro-area monetary policy
  • Some information comes from rates traders familiar with the transactions who asked not to be identified because the people are not authorized to speak publicly
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