Nell Mackenzie and Naomi Rovnick
London (Reuters) –fo’s ups have been overwhelmed by debt bets in the UK, increasing the potential for instability on the GILTS market, a reference value for borrowing costs in Britain, including mortgage, investors and sources of Hedge funds.
Bank of England chief Andrew Bailey said in February that nebancar institutions like Hedge Funds “can propagate the stress of liquidity in the basic financial markets in the UK, especially in the Gildery Market.”
This is partly due to their activities in the markets of short -term borrowings, described by Reuters with more than a dozen sources – including portfolio managers, hedge managers and former central banker.
Hedge funds borrow to finance different crafts based on 10-year-old ribbons. Tradeweb electronic platform data show that in January and February, 60% of the bond trading volumes in the UK, which is at about 53% at the end of 2023 and at least five -year maximum.
“The UK markets sometimes trade quite chaotic, because big hedge funds are pushing them around them, and sometimes there is not so much real money in their Hedge funds,” said David Aspell, a senior portfolio manager of $ 1.7 billion, Makro Hedge Fonda Mount Lucas Management, which he transferred this year.
With approximately 2.5 trillion pounds ($ 3.2 trillion) of indisputable debt, the GILTS market is dwarfed with a 28 trillion market for US cash bonds.
Volatility in bond markets affects the cost of borrowing the Government and credit conditions for households and companies.
Key crafts
The participation of the Hedge Fund in the European Bond markets has grown in recent years, and although their positioning is sometimes concerned, some officials have said to help providing liquidity.
But the UK regulators watch that hedge funds use Repo markets to position themselves in the tips. Repos – Short for Agreements on Redemption – is a source of financing that can be crucial during market stress.
Hedge funds that use Repo and are active in gilded markets include Brevan Howard, Capula Investment Management, Millennium Management and Rokos Capital Management, who trade many different classes of financial assets under one roof, said the Reuters sources.
Capula, Brevan Howard, Millennium and Rokos, who supervise the combined $ 150 billion, refused to comment.
Hedge funds are currently using Repo Financing for three different bets against Gilts, seven sources said.
One of the benefits of 10-year gilded prices compared to their derivatives of the future. Speculants buy the future, which they currently trade on the premium, and “short” cash bonds – are often called short trade. When the investor passes, they borrow securities for sale, hoping that they will return them cheaper later.
The second bet, that inflation in the UK will remain high, includes a short 10-year-old top and buying a two-year bond.
The third store recorded trendy funds dealing with the 10-year-old Gilts bets for seven of the last nine weeks, according to JPMORGAN data from March 17.
Such crafts are only a slice of individual portfolio of hedge funds, but their combined influence has caused concern.
All sources said that, in order to fund their gilded positions, HEDGE funds use an disproportionate share of borrowings available on the UK market, which is a key part of the financial system water supply.
Jillien Flores, the Chief of Advocating the Association of Managed Funds, said that the diversity of participants helped improve liquidity and market efficiency, adding: “Alternative asset managers help reduce the cost of borrowing the Government in the UK through their participation in the gilded market.”
The exclusive data of the S&P global markets for Reuters show the average use of Repo on 10-year-old Giltima during the year in February.
Reppo markets allow the bond to be temporarily vent in exchange for cash, quick and cheap ways of borrowing. Usually banks give bonds to Hedge funds, pension funds, large corporations and each other.
In November, Boe warned that the growing share of the borrowing of HEDGE Funds could take away other institutions of financing, especially if banks borrow fewer spells of market stress.
Among those who are sensitive to gilded sales are the pension schemes, which are borrowed in the Reppo markets to finance the position of protection. These derivative contracts require more money to secure them when gilded yields increase, which if the repo’s Repo market can stimulate the sale of liquid assets – including a whirlwind, accelerating sales.
“The market sales can start here,” said Andy Hill, CEO of the International Capital Markets Association.
“You need a repo market to work. There is a risk that in very unstable times, so that the balance sheets become more expensive, banks could deviate from the intermediate.”
When GILTS sold out in January, pension funds recorded £ 3 billion ($ 3.9 billion) in an additional collateral, said the Boe Bog on March 6.
In order to facilitate this risk, Boe has developed a new Liquidity facility for gilded owners such as insurance companies and certain pension schemes, but that applications must have at least £ 2 billion in the UK.
The edition of official growth and borrowing on March 26 is considered to be the following large mood test in the UK market.
James Athey, a fixed income manager in Marlborough, warned of disorders if hedge funds hurried to exit.
“When you have market shocks and changes, rapid relaxation of positions due to these changes can be escalated and caused by stability problems,” he said.
($ 1 = 0.7704 pounds)
(Additional reporting Yoruk Bahceli; Dhara Ranasinghe Mounting, Elisa Martinuzzi and Catherine Evans)
