Sarah Breeden, deputy governor of the Bank of England for financial stability, said the increased presence of hedge funds in global bond markets raises the risk of localized market turbulence turning into broader financial stress. Hedge fund gross assets stand at about $13 trillion, and they held a record 7% of the $30 trillion U.S. Treasury market according to the Office of Financial Research. The Bank of England, IMF and Federal Reserve have warned that these funds’ use of leverage and their tendency to pursue crowded trades could turbo-charge market stress. U.S. 10-year and 30-year Treasury yields hit their highest levels since 2002, while U.K. gilt yields and French OAT yields also reached multi-decade highs, fueling fears of sovereign debt stress spreading across markets.
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