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The ECB's massive bond-buying programme has fuelled a bonanza in euro zone sovereign debt, with some investors vastly overstating their orders at debt sales in a bid to secure the coveted paper. But now some governments are starting to say, enough is enough.
Borrowers including the European Union, France and Spain are moving to rein in orders from hedge funds in their syndicated bond sales, a government official and four banking sources involved in the deals told Reuters.
The aim is to stem a deluge of inflated orders from these funds, which vastly overstate their demand in an attempt to guarantee they secure their desired amount of bonds, according to the sources.
"The concern is that if you don't have the correct picture, you might make mistakes in the future about what the actual demand for the bonds is," said Stelios Leonidou, who manages Cyprus's debt issuance. He told Reuters he had raised the issue with banks, though did not say Cyprus planned to curb orders.
The investor rush to snap up sovereign debt is being partly driven by the European Central Bank's immense presence in the secondary market, where it's 1.85 trillion-euro ($2.2 trillion) pandemic war chest to shore up the euro zone economy is making it harder for investors to find bonds to buy.
The likes of hedge funds and some other investors are looking to make a quick profit by buying bonds in government sales and flipping them to the ECB for more.
Order inflation has become so extreme of late that government debt management offices are pushing back. Two bankers said they had at times seen hedge funds putting in orders that exceeded the totality of the assets they managed.
The European Union has been capping orders, mainly from hedge funds, since the beginning of the year and France did so in a March deal, according to the bankers, who declined to be named due to the sensitivity of the matter and did not specify what the level of the caps were. Spain also limited such orders in February, the sources said.
The strategy involves having managers at banks explain to the buyers during the sale process that the borrower would be capping their orders, meaning bids exceeding that cap would not be taken into consideration, the people added.
"The message was: you're not going to get any benefit from putting orders above a certain size," said one of the bankers.
A spokesperson for the European Commission said it uses an allocation policy in line with EU securities law.
France's debt management office told Reuters there was no specific cap on the order size but that banks were instructed to make investors understand it would be amenable to orders "more in line" with what they could reasonably expect to receive.
Spain's treasury said its order cap has been in place for several years and that it applies "uniformly across categories of investors".