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Bank of England warns hedge fund gilt leverage could spread stress

The BoE said hedge fund leverage in the gilt market is broadly stable but still elevated, while 10-year gilt yields have risen toward global financial crisis levels.

Reported · Written up by our desk · Central Banks

The Bank of England warned that elevated hedge fund leverage in the UK government bond market, paired with exposures to artificial intelligence assets and corporate debt, could raise the risk of financial stress spreading across markets, according to a Bloomberg report.

In its latest financial stability assessment, the BoE said strains could crystallise at the same time because vulnerabilities are interconnected, increasing the potential for a sharp market repricing.

The central bank said hedge fund leverage in the gilt market has remained broadly stable but continues to sit at elevated levels, and it pointed to rising 10-year gilt yields that have moved toward levels last seen around the global financial crisis.

The BoE’s Financial Policy Committee is considering steps to strengthen the resilience of the gilt repo market, where institutions borrow cash using government bonds as collateral.

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