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Bank of England deputy governor Sarah Breeden warned Thursday that hedge funds’ expanding role in global bond markets has increased the likelihood of a broader market shock. She said that danger is now “greater than what it was.”

Breeden serves as the central bank’s deputy governor for financial stability and is a member of its Monetary Policy Committee, which sets rates. Her concern centers on the changing mix of bond investors and their increased use of leverage.

Those changes raise the risk that turbulence beginning in one market could spread into broader financial stress. Breeden delivered the warning during an interview with CNBC’s Sri Jegarajah.

She was speaking on the sidelines of the annual meetings of the International Monetary Fund and World Bank in Bangkok, Thailand. The gatherings came as global government bond markets faced heightened pressure.

“One of the things that has become increasingly apparent over the last several years is that the investors in our core government bond markets globally have changed,” Breeden said.

Breeden contrasted the current market with its previous investor base. “It’s not the real money investors, the insurance companies and pension funds, in the way it used to be. It’s increasingly hedge funds, and those hedge funds are price-sensitive, leveraged, international.”

She added, “That, of course, means that the likelihood of a shock in one market transmitting to another is greater than what it was.”

Hedge funds now hold about $13 trillion in gross assets, according to the IMF. The institution said Tuesday that these funds have become an increasingly important component of the global investor landscape.

In its latest Global Financial Stability Report, also published Tuesday, the IMF recognized that hedge funds can support market liquidity and efficiency. However, the report also pointed to serious risks arising from their trading practices.

The IMF warned that hedge funds frequently use leverage to increase returns and can concentrate in crowded trades. During periods of turmoil, those characteristics could rapidly intensify market stress.

That stress could then spread into wider financial markets, according to the IMF. Banks’ prime brokerage businesses were among the areas identified as potentially exposed to the spillover.

“The source of the shocks are bond markets, and the likelihood of a spillover is higher than it was,” Breeden said. Her assessment placed government debt markets at the center of the potential transmission risk.

Hedge funds’ participation in global government bond markets has faced sharper scrutiny this year, particularly because of their use of so called basis trades. The scrutiny followed a sharp decline in sovereign debt prices.

Hedge funds held a record 7% of the $30 trillion Treasury market at the end of 2025. That figure came from U.S. Office of Financial Research data published on Aug. 19.

A basis trade is an arbitrage position in which a hedge fund buys cash Treasurys while shorting the corresponding futures contracts. The strategy seeks to capture the price gap between those two instruments.

That price difference is generally small, prompting hedge funds to employ large amounts of leverage in an effort to increase returns. The use of borrowed exposure is central to concerns about how these trades could behave during severe market turbulence.

Government bond yields have already moved sharply. Earlier this month, yields on 10 year and 30 year Treasurys reached their highest levels since 2002.

Across the Atlantic, yields on 10 year U.K. government bonds, known as gilts, also touched highs not seen in multiple decades. French government bond yields have risen sharply in recent weeks as well.

France’s bonds, known as OATs, have come under pressure amid growing concern about the country’s fiscal outlook. Those moves have fueled fears that a new sovereign debt crisis could affect the euro zone.

Breeden’s warning and the IMF report both focus on how leverage and concentrated positions can transmit stress beyond the market where it begins. Recent moves in sovereign debt have brought that risk into sharper view.

DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.