Key Takeaways
- • Bank of England Deputy Governor for Financial Stability Sarah Breeden told CNBC that hedge funds' growing presence in core government bond markets makes a broader market shock "greater than what it was."
- • Breeden said the investor base has shifted away from real-money investors such as insurance companies and pension funds toward price-sensitive, leveraged, international hedge funds, raising the odds that a shock in one market spreads to others.
- • According to the IMF's latest Global Financial Stability Report, hedge fund gross assets stand at about $13 trillion, and leverage and crowded trades could amplify stress, with spillovers to banks' prime brokerage businesses.
- • Hedge funds held a record 7% of the $30 trillion U.S. Treasury market at the end of 2025, per U.S. Office of Financial Research data published Aug. 19, with basis trades drawing sharper scrutiny.
Summary
Bank of England Deputy Governor Sarah Breeden has warned that hedge funds' expanding role in global bond markets raises the likelihood of a broader market shock. In an interview with CNBC's Sri Jegarajah on the sidelines of the IMF-World Bank annual meetings in Bangkok, Thailand, Breeden said the likelihood of a shock in one market transmitting to another is "greater than what it was." Breeden, who sits on the Bank's Monetary Policy Committee, argued that the composition of government bond investors has changed over recent years. Insurance companies and pension funds, traditionally the core "real money" holders, have been supplanted in part by hedge funds that are "price-sensitive, leveraged, international."
The IMF, in its Global Financial Stability Report published Tuesday, acknowledged hedge funds' contribution to market liquidity and efficiency. It also warned that the industry's use of leverage to boost returns and its tendency to pursue crowded trades could intensify stress during turmoil. With gross assets of roughly $13 trillion, according to the IMF, hedge funds have become a significant force in global investing, and the Fund flagged that strains could spill over into broader financial markets, including banks' prime brokerage operations.
Scrutiny has intensified this year, following a sharp sell-off in sovereign debt, particularly around hedge funds' use of basis trades. Such trades involve holding cash Treasurys long while shorting the corresponding futures contracts to capture a small price differential, with leverage often magnifying returns. According to U.S. Office of Financial Research data published Aug. 19, hedge funds held a record 7% of the $30 trillion Treasury market at the end of 2025.
The backdrop is one of elevated yields. Earlier this month, 10-year and 30-year U.S. Treasury yields reached their highest levels since 2002, and 10-year U.K. gilt yields touched multi-decade highs. In France, OAT yields have risen sharply in recent weeks on concerns about the country's fiscal outlook, fueling fears of a fresh sovereign debt crisis affecting the euro zone. Breeden's remarks underscore regulators' concern that a localized bond sell-off could quickly become broader financial stress.
The IMF, in its Global Financial Stability Report published Tuesday, acknowledged hedge funds' contribution to market liquidity and efficiency. It also warned that the industry's use of leverage to boost returns and its tendency to pursue crowded trades could intensify stress during turmoil. With gross assets of roughly $13 trillion, according to the IMF, hedge funds have become a significant force in global investing, and the Fund flagged that strains could spill over into broader financial markets, including banks' prime brokerage operations.
Scrutiny has intensified this year, following a sharp sell-off in sovereign debt, particularly around hedge funds' use of basis trades. Such trades involve holding cash Treasurys long while shorting the corresponding futures contracts to capture a small price differential, with leverage often magnifying returns. According to U.S. Office of Financial Research data published Aug. 19, hedge funds held a record 7% of the $30 trillion Treasury market at the end of 2025.
The backdrop is one of elevated yields. Earlier this month, 10-year and 30-year U.S. Treasury yields reached their highest levels since 2002, and 10-year U.K. gilt yields touched multi-decade highs. In France, OAT yields have risen sharply in recent weeks on concerns about the country's fiscal outlook, fueling fears of a fresh sovereign debt crisis affecting the euro zone. Breeden's remarks underscore regulators' concern that a localized bond sell-off could quickly become broader financial stress.
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