BoE's Breeden: Hedge Funds Raise Bond Shock Risk — SkimNews
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- Sarah Breeden, Bank of England deputy governor for financial stability and MPC member, told CNBC hedge funds' growing bond market presence makes broader market shocks more likely than before
- Breeden said the investor base in core government bond markets has shifted from insurance companies and pension funds to 'price-sensitive, leveraged, international' hedge funds, raising spillover risk between markets
- The IMF's Global Financial Stability Report, published Tuesday, put hedge fund gross assets at approximately $13 trillion and warned that leverage and crowded trades could 'turbo-charge' market stress and spill into banks' prime brokerage businesses
- Hedge funds held a record 7% of the $30 trillion Treasury market at the end of 2025, according to U.S. Office of Financial Research data published Aug. 19
- Hedge funds' basis trades — long cash Treasurys paired with short futures, amplified by leverage — have come under sharper scrutiny this year following the sovereign debt sell-off
- Earlier this month, 10-year and 30-year US Treasury yields hit their highest levels since 2002, while UK gilt yields touched multi-decade highs and France's OAT yields spiked sharply amid fiscal outlook concerns
Why it matters: With hedge funds now holding 7% of the $30 trillion Treasury market via leveraged basis trades, the bond market's traditional shock absorbers — pension funds and insurers — have thinned out, and the IMF explicitly flags prime brokerage units at banks as the transmission channel. France's fiscal-driven OAT yield spike illustrates the spillover path: a localized sovereign problem can now ricochet through hedge fund positions into the broader banking system.
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