According to Wall Street Insights, a series of European government bond arbitrage trades recently led to liquidations, forcing nearly a hundred London traders out of the market. This collective collapse of highly leveraged trades is impacting the European fixed income market, with a senior trader at a liquidity provider stating, "Everyone got liquidated."

The trading strategy involved buying French government bonds (OATs) and using them as collateral for financing, profiting from the spread between bond yields and repo financing costs. Over the past three years, this highly leveraged operation was prevalent in London hedge fund circles but faced two large-scale deleveraging shocks in March and October this year.

In October, the French government's budget plan was criticized as overly optimistic, prompting investors to sell French government bonds. This led to a decline in collateral value and worsening financing conditions, putting funds under pressure for margin calls. The spread between French and German 10-year government bonds (OAT-Bund spread) widened to 158 basis points in just a few days, reaching its widest level since the 2011 European sovereign debt crisis. Concurrently, the French 10-year government bond yield surpassed 5% in 2026, for the first time since July 2002. Goldman Sachs' rolling futures basket tracking "long French government bonds, short German government bonds" wiped out nearly five years of accumulated gains.