Nell Mackenzie and Naomi Rovnick reported that hedge funds are heavily involved in leveraged investments in UK government bonds, raising concerns about potential instability in the gilts market, which serves as a benchmark for borrowing costs in Britain, including mortgages. Bank of England governor Andrew Bailey highlighted in February the risk posed by non-bank entities like hedge funds to liquidity stress in the gilt market. Multiple sources, including portfolio managers and former central bankers, shared insights on hedge funds' activities in short-term lending markets as showcased through data from the trading platform Tradeweb. Hedge funds, which make up a significant portion of trading volumes for UK government bonds, engage in borrowing to finance various trades related to 10-year gilts. The gilts market, with approximately £2.5 trillion in debt, is significantly smaller than the US Treasury bond market, and fluctuations in bond markets can impact government borrowing costs and credit conditions for households and businesses. Hedge funds’ involvement in European bond markets has increased in recent years, and while regulators are watching how hedge funds utilize repo markets to position in gilts, some officials believe they help maintain market liquidity. Notable hedge funds like Brevan Howard, Capula Investment Management, Millennium Management, and Rokos Capital Management, collectively overseeing $150 billion, are active in repo financing for various bets against gilts. One common trading strategy involves taking advantage of the pricing differences between 10-year gilt futures and cash bonds, known as shorting the basis trade, where investors borrow securities to sell with the expectation of repurchasing them at a lower price.