Why hedge funds could be making a bond market shock more likely
The Bank of England's deputy governor has warned that hedge funds' activities could raise the risk of a global bond market shock.
Key points
- Bank of England deputy governor Sarah Breeden said hedge funds' growing role in bond markets raises spillover risk.
- The IMF said hedge funds hold about $13 trillion in gross assets and warned leverage could amplify market stress.
- Hedge funds held a record 7% of the $30 trillion Treasury market at the end of 2025.
Hedge funds' growing presence in global bond markets makes a broader market shock more likely, Bank of England deputy governor Sarah Breeden told CNBC on Thursday. Breeden, who oversees financial stability at the central bank, said the changing mix of bond investors and their greater use of leverage raise the risk that turbulence in one market spreads to others.
She spoke on the sidelines of the International Monetary Fund-World Bank annual meetings in Bangkok, Thailand.
Shift away from traditional investors
Breeden said core government bond markets are no longer dominated by insurers and pension funds as they once were. She described the growing group of hedge fund investors as price-sensitive, leveraged and international, which she said makes transmission of shocks between markets more likely than before.
She added that bond markets are the source of shocks and that the chance of spillover is higher than it used to be.
The source of the shocks are bond markets, and the likelihood of a spillover is higher than it was.
— Sarah Breeden
IMF warning on leverage
The IMF said Tuesday that hedge funds now hold about $13 trillion in gross assets. In its Global Financial Stability Report, it said the industry supports market liquidity and efficiency but warned that leverage and crowded trades could intensify stress during turmoil, potentially affecting areas such as banks' prime brokerage businesses.
Hedge funds' use of basis trades has drawn more scrutiny this year after a sharp sell-off in sovereign debt. Data from the U.S. Office of Financial Research published on Aug. 19 showed hedge funds held a record 7% of the $30 trillion Treasury market at the end of 2025.
Earlier this month, 10-year and 30-year Treasury yields reached their highest levels since 2002, and 10-year U.K. gilt yields also hit multi-decade highs. French OAT yields have risen sharply in recent weeks amid concerns about the country's fiscal outlook.
