Bank of England Warns of Gilts Risk From Hedge Fund Leverage

UK bonds risk being hit by a wave of forced selling by highly leveraged hedge funds, the Bank of England warned on Wednesday, underscoring the perilous market backdrop that threatens to turn against Chancellor of the Exchequer Rachel Reeves.

The British central bank said in its twice-yearly Financial Stability Report that hedge funds had been building up influence in the gilt market, and their rapid exit could see the return of fire sale dynamics that wreaked havoc during Liz Truss’ short-lived premiership. Hedge funds are borrowing a record £77 billion ($105 billion) via gilt repo agreements to add leverage to relative-value strategies including the so-called basis trade.