Key Takeaways
- • Bank of England Deputy Governor for Financial Stability Sarah Breeden said growing hedge fund participation in global government bond markets raises the risk that financial shocks spread between markets, in an interview with CNBC at the IMF and World Bank annual meetings in Bangkok.
- • The IMF's latest Global Financial Stability Report puts hedge fund gross assets at about $13 trillion and warns that leverage and crowded, similar trading strategies can intensify stress during turbulence, potentially reaching bank prime brokerage operations.
- • According to the U.S. Office of Financial Research, hedge funds held a record 7% of the $30 trillion U.S. Treasury market at the end of 2025.
- • Basis trades, which combine leveraged long Treasury cash positions with short futures, are under closer scrutiny following a sharp sell-off in government bonds this year.
- • Yields on 10- and 30-year U.S. Treasuries recently reached their highest levels since 2002, with British and French government bond yields also rising significantly.
Summary
Bank of England Deputy Governor for Financial Stability Sarah Breeden warned that the growing role of hedge funds in global government bond markets increases the risk of financial shocks spreading across markets. Speaking to CNBC during the annual meetings of the IMF and the World Bank in Bangkok, Thailand, Breeden said the investor base in key government bond markets has shifted. Insurance companies and pension funds previously played a significant role there, but hedge funds are becoming increasingly prominent.
Breeden argued that hedge funds are sensitive to price changes, use leverage, and operate across international markets. In her view, these characteristics raise the likelihood that a shock in one market will transmit to another and develop into broader financial stress. She also said bond markets are a source of shocks and that the likelihood of their spread has increased.
The International Monetary Fund raised similar concerns in its latest Global Financial Stability Report, citing hedge fund gross assets of about $13 trillion. The Fund acknowledged that hedge funds support market liquidity and efficiency, but warned that leverage and concentration of participants in similar trading strategies may intensify stress in turbulent periods. According to the IMF's assessment, such stress could spread to broader financial markets, including banks' prime brokerage operations.
Hedge fund basis trades have drawn closer scrutiny following a sharp sell-off in government bonds this year. In these transactions, funds buy U.S. Treasury securities in the spot market while selling corresponding futures contracts to profit from the price difference, often using significant leverage. According to the U.S. Office of Financial Research, hedge funds held a record 7% of the $30 trillion U.S. Treasury market at the end of 2025. Earlier this month, yields on 10- and 30-year U.S. government bonds reached their highest levels since 2002, while yields on British and French government securities also rose significantly.
Breeden argued that hedge funds are sensitive to price changes, use leverage, and operate across international markets. In her view, these characteristics raise the likelihood that a shock in one market will transmit to another and develop into broader financial stress. She also said bond markets are a source of shocks and that the likelihood of their spread has increased.
The International Monetary Fund raised similar concerns in its latest Global Financial Stability Report, citing hedge fund gross assets of about $13 trillion. The Fund acknowledged that hedge funds support market liquidity and efficiency, but warned that leverage and concentration of participants in similar trading strategies may intensify stress in turbulent periods. According to the IMF's assessment, such stress could spread to broader financial markets, including banks' prime brokerage operations.
Hedge fund basis trades have drawn closer scrutiny following a sharp sell-off in government bonds this year. In these transactions, funds buy U.S. Treasury securities in the spot market while selling corresponding futures contracts to profit from the price difference, often using significant leverage. According to the U.S. Office of Financial Research, hedge funds held a record 7% of the $30 trillion U.S. Treasury market at the end of 2025. Earlier this month, yields on 10- and 30-year U.S. government bonds reached their highest levels since 2002, while yields on British and French government securities also rose significantly.
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