Hedge funds’ expanding role in government bond markets are increasing the risk that a sharp move in one market could spread across the financial system, Bank of England Deputy Governor Sarah Breeden warned. Her comments came after a recent sell-off in global government bonds and a separate warning that leverage and crowded trades could intensify market stress.
In early 2026, net gilt-repo positioning reached its highest level since records began in 2017, with borrowing concentrated among a relatively small group of firms pursuing similar strategies.
Those strategies can support liquidity in normal conditions, but leveraged and price-sensitive funds may be forced to reduce positions quickly when repo financing becomes more expensive, banks restrict funding or market volatility triggers margin calls. Breeden said the Bank of England’s first system-wide exploratory exercise found that such activity could amplify stress in gilt markets, while the unwinding of concentrated hedge-fund positions also intensified moves in UK short-term interest rates after the Iran conflict began.
Many hedge funds operate across jurisdictions and markets, so losses or funding pressure in one area can produce correlated deleveraging elsewhere. The IMF said hedge funds managed about $13 trillion in assets globally in 2025, with gross notional exposures of roughly $40 trillion, and held about 9% of US Treasurys.
Leverage can come through repurchase agreements, prime-broker credit and derivatives. When financing tightens or investors seek withdrawals at the same time, funds may unwind crowded positions together, increasing volatility, weakening liquidity and transferring pressure to the banks that provide financing and trading services.
The financial system has absorbed several major shocks in recent years, including the pandemic, Russia’s invasion of Ukraine, overseas bank failures, the 2022 UK gilt-market crisis, trade disruptions and a major energy shock. Banks now hold more and higher-quality capital and liquidity, but the IMF said financial-stability risks remain elevated and that a sharp rise in sovereign yields caused by inflation or fiscal concerns could have broad repercussions.
The Bank of England is considering measures including greater central clearing for repo transactions and minimum haircuts on some non-centrally cleared repo trades.