Hedge Funds’ Rising Leveraged Bond Bets Pose a Risk, BOE says

Hedge funds are increasing their exposure to leveraged bond-market strategies such as the basis trade, according to the Bank of England, creating risks to financial stability should they be forced to rapidly unwind their positions.

Borrowing in repo markets by hedge funds relative to their equity capital has climbed to the highest since 2020 in the first quarter, the central bank said in its Financial Stability Report published Thursday, citing data from the UK’s Financial Conduct Authority.

While the BOE acknowledged the trades provide liquidity to the market, these relative-value strategies risk blowing up when unexpected events spur volatility, amplifying ...