BOE Warns of Rising Gilt Risk From Hedge Funds’ Basis Trades

The Bank of England warned about growing risks from a profitable fixed-income hedge fund strategy known as the basis trade, calling on market participants to manage their risk taking to avoid a disruptive unwinding of trades that could prompt volatility in gilts.

Hedge fund net gilt repo borrowing — where they borrow cash by pledging gilts as collateral — reached close to £100 billion ($132 billion) in November, the central bank said Tuesday, the highest since data collection began. That compares to a £77 billion estimate in June.