Bank of England deputy governor Sarah Breeden told CNBC on Thursday that the growing presence of hedge funds in global bond markets could result in broader market shocks being “bigger than before.”
Breeden, the central bank’s deputy governor for financial stability and a member of its rate-setting monetary policy committee, said the changing composition of bond market investors and their increased use of leverage increased the risk that localized market turmoil could turn into broader financial stress.
“One of the things that has become increasingly clear over the last few years is that the investors in our core government bond market have changed globally,” Breeden told CNBC’s Sri Jegaraja in an interview Thursday.
“It’s not the real money investors of the past, insurance companies or pension funds. Increasingly, it’s hedge funds, and those hedge funds are price-sensitive, leveraged and international. This of course means that shocks in one market are more likely than ever to be transmitted to another market.”
Breeden was speaking on the sidelines of the International Monetary Fund/World Bank Annual Meeting in Bangkok, Thailand.
US 10 year government bond.
Hedge fund assets grow
The IMF said on Tuesday that with total assets now reaching about $13 trillion, hedge funds have become an increasingly important part of global investors.
In its latest Global Financial Stability Report released on Tuesday, the IMF acknowledged the role of hedge funds in supporting market liquidity and efficiency.
But it also warned that the hedge fund industry’s tendency to use leverage and pursue crowded trades to boost profits could accelerate market stress in times of turmoil.
The impact could spill over into broader financial markets and into areas such as banks’ prime brokerage businesses, the IMF said.
“The source of the shock is the bond market, and the potential for spillovers is higher than before,” Breeden said.
Hedge funds’ presence in global government bond markets, particularly their use of so-called “basis trading”, has come under increased scrutiny this year following the sharp decline in sovereign debt.
Hedge funds held a record 7% of the $30 trillion government bond market at the end of 2025, according to data from the U.S. Financial Research Service released on August 19.
Basis trading is an arbitrage transaction in which hedge funds take long positions in physical government bonds while shorting corresponding futures contracts in order to profit from price differences. Although the price difference between the two is relatively small, hedge funds often use heavy leverage to further inflate their returns.
French 10-year OAT.
Early this month, 10 years and 30 year treasury Yields have reached their highest level since 2002. Across the Atlantic, yields are 10 year UK government bondA stock known as Gilt also hit a multi-decade high.
Yields on French government bonds, known as OAT, have risen sharply in recent weeks amid growing concerns about the country’s fiscal outlook and fears that a new sovereign debt crisis could spill over into the eurozone.
