Hedge Fund Leverage Raises Threat of Global Bond Market Shocks, Bank of England Warns
Bank of England Deputy Governor Sarah Breeden warns that leveraged hedge funds in government debt markets increase the risk of financial contagion.
At a glance
- Bank of England's Sarah Breeden warned that hedge fund leverage increases the likelihood of cross-market financial shocks.
- The IMF reported hedge fund gross assets reached about $13 trillion, warning that crowded and leveraged trades risk market turmoil.
- Hedge funds owned a record 7% of the $30 trillion U.S. Treasury market at the end of 2025 as global bond yields hit multi-decade highs.
Growing participation and borrowing by hedge funds in government bond markets have made broader financial contagion more likely, Bank of England Deputy Governor Sarah Breeden warned in an interview with CNBC on Thursday.
Speaking on the sidelines of the International Monetary Fund and World Bank annual meetings in Bangkok, Thailand, Breeden highlighted a major structural shift in sovereign debt ownership. Core government debt markets are no longer dominated by traditional "real money" buyers such as pension funds and insurance companies. Instead, highly leveraged, price-sensitive international hedge funds are playing a significantly larger role, raising the likelihood that localized stress will rapidly spread across borders.
Shifting Investor Landscape
Breeden, who oversees financial stability at the central bank and sits on its Monetary Policy Committee, noted that while bond markets themselves generate initial shocks, the probability of spillovers into wider financial systems is elevated compared to past years.
Her concerns mirror those released by the IMF in its latest Global Financial Stability Report. The fund reported that hedge fund gross assets have climbed to around $13 trillion. While acknowledging that these funds help provide liquidity and price efficiency, the IMF warned that heavy leverage and crowded positioning could amplify stress during sudden downturns. Such instability could subsequently spill into banking sectors and prime brokerage operations.
Scrutiny Over the Basis Trade
Regulators have paid particular attention to popular strategies such as the basis trade, where hedge funds exploit tiny price discrepancies between cash bonds and futures contracts by borrowing heavily to magnify returns. Data from the U.S. Office of Financial Research showed hedge funds held a record 7% of the $30 trillion Treasury market at the end of 2025.
These warnings arrive during severe turbulence in global fixed-income markets. Yields on 10-year and 30-year U.S. Treasuries recently climbed to levels unseen since 2002, while benchmark yields on British gilts hit multi-decade highs. Concurrently, French government debt yields have surged amid fiscal uncertainties, renewing concerns over sovereign debt stability in the euro zone.
Source: CNBC.
Questions and answers
- Why are regulators concerned about hedge funds in the bond market?
- Unlike traditional pension and insurance investors, hedge funds rely on leverage and price-sensitive strategies, which can amplify market stress and spread turbulence across global financial systems.
- What is the basis trade in government bonds?
- It is an arbitrage strategy where funds buy cash Treasurys and short corresponding futures contracts to profit from minor price differences, using high leverage to boost returns.
