Breeden warns of risk of contagion from hedge funds — CNBC

In Bangkok, Thailand, Bank of England Deputy Governor for Financial Stability Sarah Breeden said that the growing role of hedge funds in global government bond markets increases the risk of financial shocks spreading between markets. She said this in an interview with CNBC during the annual meetings of the IMF and the World Bank.

Changing investor structure

According to Breeden, the composition of investors in key global government bond markets has changed in recent years. While insurance companies and pension funds previously played a significant role in these markets, hedge funds are now becoming increasingly prominent.

She noted that hedge funds are sensitive to price changes, use leverage, and operate in international markets. In her view, this increases the likelihood that a shock in one market will be transmitted to another and develop into broader financial stress.

IMF warning

The International Monetary Fund also drew attention to risks associated with hedge fund activity in its latest Global Financial Stability Report. According to the IMF, their gross assets amount to about $13 trillion. The Fund acknowledged that hedge funds support market liquidity and efficiency, but warned that leverage and the concentration of participants in similar trading strategies may intensify market stress during periods of turbulence.

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According to the IMF's assessment, such stress may spread to broader financial markets, including banks' prime brokerage operations. Breeden also said that bond markets are a source of shocks and that the likelihood of their spread has increased.

Basis trades

Following the sharp sell-off in government bonds this year, hedge funds' basis trades have come under closer scrutiny. In such transactions, funds buy U.S. Treasury securities on the spot market while simultaneously selling corresponding futures contracts in an attempt to profit from the price difference. They often use significant leverage to increase returns.

According to the U.S. Office of Financial Research, at the end of 2025 hedge funds held a record 7% of the $30 trillion U.S. Treasury market. Earlier this month, yields on 10- and 30-year U.S. government bonds reached their highest levels since 2002, while yields on British and French government securities also rose significantly.