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France back in hedge funds’ sights as economy stutters

(Reuters) – Hedge funds are restoring bets that French bond prices will fall, speculating the country’s gamble on increasing public spending to boost economic growth will fail.

Funds have already been burnt on the trade. Last year, the European Central Bank’s promise to buy government bonds to restore confidence in the euro zone sent yields on French 10-year bonds tumbling by more than a third.

But that is not putting some off from trying again.

With President Hollande’s approval ratings at the lowest of any modern French leader and March jobless claims at an all-time high, some funds think the country’s bond yields should trade closer to those of Italy and Spain than Germany.

“The most interesting bet to make in Europe is in France. I still feel in France that the risks are really underpriced,” said Philippe Gougenheim, CEO of Swiss-based Gougenheim Investments, who has recently gone long German bunds and short French bonds using futures.

According to data group Markit, the volume of French bonds out on loan has risen 17 percent from an October low to more than $54 billion (35 billion pounds) last week. This can indicate short-selling – borrowing a security to sell it with the aim of buying it back at a lower price – although the bonds can also be borrowed by institutions wanting to hold sovereign debt as collateral.

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