Bank of England deputy governor Sarah Breeden says the growing role of hedge funds in government bond markets raises the risk that a shock spreads between markets. The IMF issued a similar warning this week, following a sharp sell-off in global government bonds.
Bank of England deputy governor Sarah Breeden told CNBC on Thursday that hedge funds' larger presence in global bond markets makes a broader market shock more likely. She is the central bank's deputy governor for financial stability and sits on its Monetary Policy Committee.
Hedge funds replace traditional bond buyers
Breeden said the investors in core government bond markets have changed, and that the likelihood of a shock moving from one market to another is, in her words, "greater than what it was." She described the buyers as increasingly hedge funds rather than insurance companies and pension funds, and called those funds price-sensitive, leveraged and international.
In its latest Global Financial Stability Report, the IMF said hedge funds' gross assets now stand at about $13 trillion. It acknowledged their role in supporting market liquidity and efficiency.
The IMF also warned that the industry's use of leverage to boost returns, and its tendency to pursue crowded trades, could turbo-charge market stress in times of turmoil. That could spill over into broader markets and into areas such as banks' prime brokerage businesses, according to the IMF.
Basis trades draw scrutiny after the sell-off
Hedge funds' presence in the government bond market, particularly their use of so-called basis trades, has come under sharper scrutiny this year after the sell-off in sovereign debt. Hedge funds held a record 7% of the $30 trillion Treasury market at the end of 2025, according to U.S. Office of Financial Research data.
In a basis trade, hedge funds go long cash Treasurys while shorting the corresponding futures contracts, aiming to profit from the price gap. Because that gap is relatively small, hedge funds often use large amounts of leverage to inflate returns.
Yields hit multi-decade highs
Earlier this month, 10-year and 30-year Treasury yields hit their highest levels since 2002. Yields on 10-year U.K. gilts also touched multi-decade highs.
French government bond yields have moved sharply higher in recent weeks amid concerns about the country's fiscal outlook, fueling fears of a fresh sovereign debt crisis affecting the euro zone.
Source: CNBC
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