The new head of the Bank for International Settlements has urged policymakers to tighten oversight of hedge fund leverage in government bond markets as sovereign debt levels continue to rise, according to a report by Reuters.
Pablo Hernández de Cos, who became BIS General Manager in July, said elevated public borrowing and the growing role of non-bank financial institutions in bond trading are creating fresh stability risks.
Speaking at the London School of Economics, he pointed to the rapid growth of leveraged relative-value trades, including cash-futures basis strategies, which contributed to volatility in US Treasuries in 2021.
De Cos noted that around 70% of US-dollar bilateral repos with hedge funds and half of those in euros are written at zero haircut, effectively imposing no limits on leverage. With advanced-economy debt-to-GDP ratios projected to reach 170% by 2050, he said curbing NBFI leverage should be a “key policy priority”.
