Bank of England warns hedge fund leverage raises bond market shock risk

Bank of England Deputy Governor for Financial Stability Sarah Breeden has warned that hedge funds' growing presence in core government bond markets is making cross-market contagion more likely. Speaking on the sidelines of the International Monetary Fund-World Bank annual meetings in Bangkok, Thailand, Breeden said the investor base has shifted away from traditional long-term holders such as insurers and pension funds toward hedge funds that are more price-sensitive, leveraged and international. In her view, this change increases the chances that a shock in one bond market transmits quickly to another, and the likelihood of spillovers is higher than before, as reported by CNBC.

Data cited in the coverage underline the scale of hedge fund involvement. U.S. Office of Financial Research data published on Aug. 19 show hedge funds held a record 7% of the $30 trillion Treasury market at the end of 2025. The IMF estimates hedge funds now account for about $13 trillion in gross assets. In its latest Global Financial Stability Report, published Tuesday, the IMF says hedge funds support market liquidity and efficiency, but warns that leverage and crowded trades can intensify stress during turmoil and spill into wider markets, including banks' prime brokerage activities.

Scrutiny is focused on basis trades, which involve buying cash Treasurys while shorting corresponding futures contracts to capture small pricing gaps. The strategy often relies on heavy leverage, and forced unwinding during market stress can amplify volatility. The concern comes amid sharp pressure across sovereign debt markets. Earlier this month, yields on 10-year and 30-year U.S. Treasurys reached their highest levels since 2002. In Europe, 10-year UK gilt yields touched multi-decade highs, while French OAT yields have risen sharply in recent weeks on concerns over the country's fiscal outlook, adding to fears of a renewed sovereign debt crisis affecting the euro zone.

Taken together, the warnings point to heightened sensitivity in global sovereign bond markets, where stress in one jurisdiction could propagate through leveraged investors to others. The coverage does not indicate a specific triggering event beyond the broader sell-off in sovereign debt.