Bank of England: A small number of highly leveraged hedge funds could potentially trigger a repeat of the selling spree in UK bonds seen during the Taper Tantrum period.

The Bank of England warned on Wednesday that the UK bond market faces the risk of a forced sell-off by highly leveraged hedge funds, highlighting the fragility of the market environment and potentially putting UK Chancellor Rishi Sunak in a difficult position. The Bank of England pointed out in its semi-annual Financial Stability Report that the influence of hedge funds in the UK bond market continues to rise, and their rapid exit could lead to a return of the rapid selling seen during the brief tenure of former Prime Minister Liz Truss. Hedge funds have borrowed a record 77 billion through UK bond repurchase agreements, adding leverage to relative value strategies including basis trading.