Hedge Funds’ Expanding Role Heightens Bond Market Shock Risks, BoE Official Warns

Bank of England Deputy Governor for Financial Stability Sarah Breeden warned that hedge funds’ expanding footprint in global bond markets is raising the probability of a broader market shock. Speaking on the sidelines of the IMF‑World Bank annual meetings in Bangkok, she said the shift in investor composition—from traditional “real‑money” investors such as insurers and pension funds to leveraged, price‑sensitive hedge funds—means that turbulence in one market is more likely to spill over to others.

“One of the things that has become increasingly apparent over the last several years is that the investors in our core government bond markets globally have changed,” Breeden told CNBC’s Sri Jegarajah. “It’s not the real‑money investors, the insurance companies and pension funds, in the way it used to be. It’s increasingly hedge funds, and those hedge funds are price‑sensitive, leveraged, international. That, of course, means that the likelihood of a shock in one market transmitting to another is greater than what it was.”

She added that the increased use of leverage by hedge funds amplifies the risk that localized market stress could evolve into broader financial strain, a concern echoed by the International Monetary Fund.

The IMF’s latest Global Financial Stability Report highlighted that hedge‑fund assets now total roughly $13 trillion, underscoring their importance for market liquidity and efficiency. However, the Fund warned that the sector’s reliance on leverage and its tendency to pursue crowded trades could “turbo‑charge” market stress during periods of turmoil, potentially spilling over into banking prime‑brokerage activities.

“The source of the shocks are bond markets, and the likelihood of a spillover is higher than it was,” Breeden noted.

Hedge fund assets swell

With gross assets now standing at about $13 trillion, hedge funds have become an increasingly important part of the global investor landscape, the IMF said on Tuesday. In its latest Global Financial Stability Report, published Tuesday, the IMF acknowledged hedge funds’ role in supporting market liquidity and efficiency.

But it also warned that the hedge‑fund industry’s use of leverage to boost returns, and its tendency to pursue crowded trades, could turbo‑charge market stress in times of turmoil. That, in turn, could spill over into broader financial markets, and areas such as banks’ prime‑brokerage businesses, according to the IMF.

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 on Aug. 19.

Basis trades—an arbitrage strategy where funds go long cash Treasurys while shorting corresponding futures—remain a focus. Although the price differential between the two instruments is relatively small, hedge funds often employ large amounts of leverage to amplify returns.

France 10-Year OATs.

Earlier this month, 10‑year and 30‑year Treasury yields hit their highest levels since 2002, while 10‑year U.K. gilt yields also touched multi‑decade highs. Yields on France’s government bonds, known as OATs, have moved sharply higher in recent weeks amid rising concerns about the country’s fiscal outlook, fueling fears of a fresh sovereign‑debt crisis that could impact the euro zone.

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