London-based hedge funds have shed close to 100 European government bond traders and portfolio managers following significant losses on leveraged fixed income strategies, according to a report by eFinancialCareers.

The departures follow years of aggressive hiring by multi-strategy hedge funds seeking to capitalise on European sovereign debt markets. Industry sources estimate that the number of traders leaving funds has risen from around 75 to nearly 100 in recent weeks.

The losses have been concentrated in leveraged carry trades involving French government bonds, known as OATs. Hedge funds have used repo financing to build positions in sovereign debt, earning the spread between bond yields and borrowing costs.

However, rising French government bond yields amid political instability have driven down bond prices, putting pressure on leveraged positions and forcing funds to reassess their exposure.

Traders cited by eFinancialCareers said some portfolio managers had suffered losses on similar strategies earlier this year, raising concerns about the sustainability of European sovereign bond carry trades.

The disruption has also heightened concerns over Italian government bonds, with market participants warning that widening spreads on BTPs could create further pressure on leveraged fixed income portfolios.

The scale of the losses remains unclear, and not all departures have been performance related. Industry sources suggested that some traders had left voluntarily, including to pursue opportunities to establish independent funds with external capital.

Banks could absorb some of the displaced traders as they seek expertise in European Central Bank exposure and sovereign bond portfolios. However, non-compete restrictions and differences in compensation may limit immediate moves, with some hedge fund traders previously earning more than $1m annually.

The departures mark a sharp reversal for a sector that had attracted substantial capital and talent into European rates strategies, as losses prompt renewed scrutiny of leverage and the risk-adjusted returns available from sovereign bond carry trades.