The Bank of England's deputy governor warns that the growing presence and leverage of hedge funds in global bond markets increase the risk of a market shock spreading to other areas.
01Summary
- 01Sarah Breeden, deputy governor for financial stability at the Bank of England, told CNBC that the changing mix of bond market investors raises the risk of contagion.
- 02Hedge funds now hold a record 7% of the $30 trillion US Treasury market, and global hedge fund gross assets stand at about $13 trillion.
- 03The IMF warned that hedge funds' use of leverage and crowded trades could amplify market stress and spill over into areas such as banks' prime brokerage businesses.
- 0410-year and 30-year Treasury yields hit their highest levels since 2002 earlier this month, while UK and French government bond yields also rose sharply.
- 05Hedge funds' 'basis trades' – arbitrage bets using leveraged positions in cash Treasurys and futures – have come under greater scrutiny after the recent sell-off in sovereign debt.
02Why it matters
This matters because a bond market shock triggered by hedge fund activity could quickly spread to other financial markets and institutions, affecting borrowing costs, pensions, and investment returns for individuals and businesses worldwide.
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