The Bank of England has warned that excessive leverage among hedge funds poses a growing threat to the UK government bond market, raising fears of a repeat of the 2022 gilt market crisis triggered during Liz Truss’s brief premiership, according to a report by Bloomberg.
In its latest Financial Stability Report, the central bank highlighted that hedge funds have accumulated a record £77bn ($105bn) of leverage through gilt repo trades – primarily to fund relative-value strategies like the basis trade. Some 90% of that borrowing is concentrated among a “small number” of hedge funds, magnifying the risk of a destabilising fire sale if those funds unwind positions simultaneously.
The report comes amid heightened political and market tensions, as Chancellor Rachel Reeves navigates a precarious fiscal landscape. With pension funds pulling back from gilts and the Bank unwinding its holdings, the government is increasingly reliant on foreign investors, whose risk appetite has proven volatile.
Bank Governor Andrew Bailey said the presence of elevated leverage in markets is “undeniable,” and warned that simultaneous deleveraging could trigger liquidity shocks. The Bank underscored concerns that these hedge fund strategies, while adding liquidity in normal conditions, are vulnerable to abrupt reversals that could send yields surging.
The warning follows recent volatility in the gilt market, where 30-year yields jumped nearly 20 basis points amid political instability over welfare policy. Analysts suggest the BOE’s message adds urgency to the debate over UK fiscal policy and market resilience.
The central bank also announced plans to release a discussion paper later this year proposing reforms to the UK’s repo market, including wider use of central clearing and minimum haircut rules to limit leverage.
