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HedgeCo.Net \u2014 Hedge funds’ expanding presence in global government bond markets makes it more likely that a shock in one market spreads to others, Bank of England Deputy Governor Sarah Breeden said in an interview with CNBC published on October 18. Speaking on the sidelines of the IMF-World Bank annual meetings in Bangkok, Breeden said core sovereign markets are increasingly held not by insurers and pension funds but by hedge funds that are “price-sensitive, leveraged, international.”<\/p>\n
Her comments followed the International Monetary Fund’s October 2026 Global Financial Stability Report, which devoted a chapter to hedge funds and financial stability. The IMF said hedge funds held about $13 trillion in gross assets by early 2026, up from about $4 trillion in 2013, with gross notional exposure including derivatives above $40 trillion. The fund acknowledged hedge funds’ role in supporting liquidity and market efficiency, but warned that leverage, crowded trades and investor redemptions can force synchronized deleveraging that amplifies stress and spills over to prime brokers.<\/p>\n
The warnings land after a sharp sell-off in sovereign debt. CNBC noted that 10-year and 30-year U.S. Treasury yields reached their highest levels since 2002 earlier this month, while U.K. gilt yields touched multi-decade highs and French government bond yields climbed on fiscal concerns. Hedge funds held a record 7% of the roughly $30 trillion Treasury market at the end of 2025, according to U.S. Office of Financial Research data cited by CNBC.<\/p>\n
At the center of the debate is the basis trade, in which funds buy cash government bonds and short the matching futures, using substantial leverage to monetize a small price gap. “The source of the shocks are bond markets, and the likelihood of a spillover is higher than it was,” Breeden said. The strategy is a staple of relative-value and multi-strategy platforms, and it relies on stable repo funding and orderly margin calls.<\/p>\n
For allocators, the policy direction matters as much as the market moves. Central bankers and the IMF are signaling closer attention to fund leverage, margining and prime-broker concentration, which could raise the cost of running levered fixed-income books. Investors in relative-value and multi-manager funds will want to understand how much of their managers’ return depends on balance-sheet-intensive bond trades, and how those positions behaved during this month’s sell-off.<\/p>\n","protected":false},"excerpt":{"rendered":"
HedgeCo.Net \u2014 Hedge funds’ expanding presence in global government bond markets makes it more likely that a shock in one market spreads to others, Bank of England Deputy Governor S\u2026 Continue reading