Rolling coverage of the latest economic and financial news, as the Bank of England releases its Financial Stability Report
Hedge funds who dabble in the market for UK government bonds in the search for profits are another threat to the country’s financial stability.
The Bank of England’s new financial stability report shows that leveraged borrowing by hedge funds in gilt repo markets “remains elevated”, reaching close to £100 billion in November.
A small number of hedge funds account for more than 90% of net gilt repo borrowing, with trades often transacted at zero or near-zero collateral haircuts and at very short maturities and so require regular refinancing. These vulnerabilities, in the context of compressed risk premia in a highly uncertain global environment, increase the risk of sharp moves.
Funds could need to deleverage simultaneously in response to a shock if funding conditions tightened to the extent that refinancing became unavailable or prohibitively expensive. This reinforces the need for market participants to ensure the risk management of their positions takes account of potential shocks, including correlation shifts outside historical norms.
Continue reading…Rolling coverage of the latest economic and financial news, as the Bank of England releases its Financial Stability Report Hedge funds who dabble in the market for UK government bonds in the search for profits are another threat to the country’s financial stability.The Bank of England’s new financial stability report shows that leveraged borrowing by hedge funds in gilt repo markets “remains elevated”, reaching close to £100 billion in November.A small number of hedge funds account for more than 90% of net gilt repo borrowing, with trades often transacted at zero or near-zero collateral haircuts and at very short maturities and so require regular refinancing. These vulnerabilities, in the context of compressed risk premia in a highly uncertain global environment, increase the risk of sharp moves.Funds could need to deleverage simultaneously in response to a shock if funding conditions tightened to the extent that refinancing became unavailable or prohibitively expensive. This reinforces the need for market participants to ensure the risk management of their positions takes account of potential shocks, including correlation shifts outside historical norms. Continue reading…
