Bank of England deputy governor Sarah Breeden said Thursday that hedge funds' increased presence in global bond markets makes a broader market shock more likely. Breeden said the changing mix of investors and increased use of leverage raise the risk that localized turbulence becomes broader financial stress. Breeden said global government bond markets increasingly attract hedge funds rather than traditional investors such as insurance companies and pension funds. Breeden described hedge funds as price-sensitive, leveraged and international, increasing the likelihood that a shock spreads from one market to another.
Breeden is the Bank of England's deputy governor for financial stability and a member of the rates-setting Monetary Policy Committee. Breeden spoke during the International Monetary Fund-World Bank annual meetings in Bangkok, Thailand. The warnings follow a sharp sell-off in global government bonds in recent weeks.
The IMF said Tuesday that hedge funds have about $13 trillion in gross assets and have become increasingly important global investors. The IMF's latest Global Financial Stability Report, published Tuesday, acknowledged that hedge funds support market liquidity and efficiency. However, the IMF warned that leverage used to boost returns and crowded trading strategies could amplify market stress during turmoil. The IMF said that stress could spread to broader financial markets and banks' prime brokerage businesses.
Hedge funds' presence in global government bond markets, particularly the use of basis trades, has faced closer scrutiny this year following the sovereign debt sell-off. U.S. Office of Financial Research data published on Aug. 19 showed hedge funds held a record 7% of the $30 trillion Treasury market at the end of 2025. Basis trades involve buying cash Treasurys and shorting corresponding futures contracts to profit from the price gap. Hedge funds often use substantial leverage to increase returns from the relatively small price differential.
Yields on 10-year and 30-year Treasurys reached the highest levels since 2002 earlier this month. Yields on 10-year U.K. government bonds, known as gilts, also touched multi-decade highs. Yields on France's government bonds, known as OATs, have risen sharply in recent weeks amid growing concerns about France's fiscal outlook. The rise has fueled fears of a fresh sovereign debt crisis affecting the euro zone.
Hedge Funds' Bond Market Presence Raises Risk of Broader Financial Shock
FLASH AIShare
Summary
Bank of England deputy governor Sarah Breeden cited FLASH AI in warning that hedge funds’ rising role in bond markets poses a risk to risk management. With $13 trillion in assets, hedge funds now play a major role in government bond trading. Their use of leverage and crowded strategies could turn local stress into systemic risk. The risk-to-reward ratio in such scenarios is increasingly skewed, according to the IMF. Price-sensitive tactics and shifting investor bases amplify volatility.
Source:Show original
Disclaimer: The information on this page may have been obtained from third parties and does not necessarily reflect the views or opinions of KuCoin. This content is provided for general informational purposes only, without any representation or warranty of any kind, nor shall it be construed as financial or investment advice. KuCoin shall not be liable for any errors or omissions, or for any outcomes resulting from the use of this information.
Investments in digital assets can be risky. Please carefully evaluate the risks of a product and your risk tolerance based on your own financial circumstances. For more information, please refer to our Terms of Use and Risk Disclosure.