Market News

The Bank of England has sounded the alarm about foreign hedge funds buying up UK debt, warning that their speculative trades could spark a crisis.

The British Government is becoming increasingly reliant on a small group of opaque foreign investors to finance its large deficit, Threadneedle Street officials warned.

Buying UK government bonds, known as gilts, allows hedge funds to bet on tiny differentials between current and future prices.

However, they also often borrow against the same gilts to juice the returns on their investments.

Hedge funds borrowed £100bn secured against gilts in November – the highest since records began in 2017.

The Bank is worried that this could all collapse like a house of cards in response to a financial shock, potentially sparking a doom loop of fire sales as hedge funds offload gilts to cover losses on these loans.

“The small number of funds running crowded and heavily leveraged trades in the gilt repo market increases the potential risk of sharp moves as funds could need simultaneously to deleverage in response to a shock,” the Bank said in its financial stability report.

Andrew Bailey, the Governor, said he was considering placing limits on the scale of bets that hedge funds can make on movements in the UK debt market to bring down the risks of a dramatic sell-off.

The Bank has published a discussion paper that could place minimum margin requirements on the bets made by investors that use leverage.

Mr Bailey insisted officials were not considering the plan “on a whim”.

“The reason that we would come out with a conclusion that it was sensible to have haircuts and to have margining, would be because of the risks in the system,” he said.