June 5, 2018 / 10:42 AM / 9 months ago

UPDATE 1-Short selling interest in Italian govt debt rises - IHS Markit

(Adds details, quotes, graphic)

By Saikat Chatterjee, Maiya Keidan and Ritvik Carvalho

LONDON, June 5 (Reuters) - Demand for borrowing Italian government bonds rose by nearly a billion dollars in April and May, data from IHS Markit showed, a proxy for short-selling interest on heightened concerns over political uncertainty in Italy.

That indicated a growing interest in borrowing and selling the bonds in the hope of buying them back at a lower price later, a strategy commonly employed by hedge funds.

The amount of Italian government bonds out on loan rose by $959 million since the start of April - at a time of a broad decline in interest in borrowing other European government bonds.

That follows a $7 billion increase in the first quarter of 2018, the data released to Reuters late on Monday showed.

Roughly 10 percent of the Italian government debt out on loan was on 10-year maturities, particularly the 4.75 percent bond maturing in 2018, reflecting interest from hedge funds in taking tactical bets that the coalition formed by the anti-establishment parties would ramp up fiscal spending to support its economy.

Thomson Reuters data shows that open interest on short-dated Italian government bonds surged ahead of last week’s sell off in another sign that investors were taking bets against Italian debt.

Filippo Lanza, CIO at Numen Capital, said the firm had been short on peripheral government bonds including Italy ahead of the market rout, partly based on a view of a likely shift in policy from the European Central Bank.

“During the month, we have moved opportunistically from being short German Bunds as the most overvalued security in the global fixed in-come universe to short periphery spreads, and we have now largely reduced our overall exposures,” he said.

A degree of calm has a returned to Italy’s bond market after last week saw one of the biggest selloffs in Italian government bond markets since the euro zone debt crisis of 2010-2012.

Still further bouts of volatility are seen as likely given that the anti-establishment parties making up Italy’s new government are set for a big fiscal expansion that is likely to bring the country into conflict with European Union rules.

Reporting by Saikat Chatterjee and Maiya Keidan; Graphics by Ritvik Carvalho; Editing by Dhara Ranasinghe and Andrew Heavens

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