Paulson goes short on German Bunds

John Alfred Paulson, president of Paulson & Co., Inc, appearing before a U.S. Congressional committee on November 13, 2008.

Story highlights

  • John Paulson is betting against German bunds, believing EU debt crisis will deepen
  • The billionaire hedge fund manager foresaw the collapse of the US housing market

John Paulson, the billionaire hedge fund manager who foresaw the collapse of the US housing market, is shorting German government bonds in a wager that the eurozone debt crisis will significantly deepen in the coming months.

Mr Paulson told investors in a call on Monday that he was betting against the creditworthiness of Germany, regarded in markets as among the safest sovereign borrowers, because he saw the problems affecting the eurozone deteriorating severely, said a person familiar with Mr Paulson's strategy.

The 56-year old hedge fund manager, who oversees $24bn at his New York-based firm Paulson & Co, believes that problems for the Spanish government will spill over to threaten the stability of the eurozone as a whole.

While Spanish bond yields this week rose to multi-month highs above 6 per cent, German 10-year Bunds yields have recently traded as low as 1.66 per cent, within a whisker of record lows.

Mr Paulson's position, which includes holdings of credit default swaps written on German debt, has been in place for several months.

A spokesperson for Paulson & Co declined to comment.

Broad details of the positions came as part of a quarterly call to reassure investors of his funds' recent progress, according to a client of the firm.

Many Paulson & Co clients were rattled last year by steep losses across Mr Paulson's range of funds. His flagship Advantage plus fund dropped 51 per cent in value, wiping out billions of investors' money.

Mr Paulson said the firm had instituted new risk management measures, including committees to meet regularly and discuss exposures, to help improve its management of money in the future.

In spite of 2011's losses, Mr Paulson's longer-term track record is still among the best in the $2tn hedge fund industry.

Paulson & Co has been closely watching Spanish banks for many months now, and was initially rumoured to be a potential buyer of stakes in several.

Analysts at the hedge fund firm have noted the rise in borrowing from Spanish lenders from the European Central Bank this year, as well as questions over the Spanish government's resolve to tackle its fiscal difficulties.

Mr Paulson's bearish view is shared by the head of world's largest hedge fund manager, Ray Dalio, whose Bridgewater Associates recently issued a note to clients saying that Spain was worse off than it was last year.

Mr Dalio believes more government debt restructurings, such as that experienced by Greece, will need to be instigated for European sovereign borrowers.