Hedge Funds’ £2.2T Gilt Bet Looms Over Global Stability, FSB Warns

Global financial stability faces heightened risk as hedge funds hold a record £2.2tn in government bonds, with the Financial Stability Board (FSB) chaired by Andrew Bailey warning of potential fire sales and a spike in borrowing costs if economic shocks arise. As of November 30, hedge funds borrowed £100bn in gilts—10 times the level a year earlier—leveraging repo markets to finance 25% of their assets, with global repo exposure reaching $3tn (about half of the $16tn market). The UK accounts for roughly 15% of the repo market. In stress periods, cash demand outpaces supply, prompting rapid asset liquidation that can drive down sovereign bond prices and amplify cross-market volatility. Regulators are considering measures such as central clearing and larger haircuts to curb leverage.