WEST PALM BEACH, FL (www.hedgeco.net)Hedge funds still have net long positions in the European euro and pound sterling corporate bonds according to a new survey conducted by Citigroup. The studyfurther showed that when such positions are liquidated, the market would feel more pressure. Such positions have been cut back few months ago particularly in light of the low yield premiums in thecorporate bond markets.

The new report shows that hedge funds still maintain their net long positions in the credit markets as they were during the past month. The high-yield bond markets was basically abandoned in May 2004, when significant number of investors in that market readjusted their holdings following expectations that the U.S. interest rates will be raised by the Federal Reserve policy makers.

The report noted, “The extent of that buying seems unlikely to be sufficient to offset the impact of any further hedge fund selling, the possibility that widening spreads or hedge fund redemptions cause the forced exiting of illiquid positions — with real money still largely sitting on the sidelines — seems to us a significant risk.”

The credit markets have suffered since the General Motors and Ford Motors profit warning issued in March, and since that point, spreads have widened significantly. The new report says that Telecoms and subordinated bank debt now remain among the most favored sectors. In a memo to their clients, DrKW analysts said, “We believe that further more generic spread widening is at hand, as volatility rises and investor appetite for the asset class is undergoing re-examination.�

Paul Oranika
Editor-in-Chief
HedgeCo.Net
Email: Editor@hedgeco.net

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