Hedge funds help fill bond-buying void left by central banks

(Reuters) – Hedge funds are helping to fill a bond-buying gap in European government bond markets left by central banks and playing an important role in boosting liquidity, debt agency chiefs from some of the region’s biggest issuers said on Wednesday.

The European Central Bank greatly reduced its bond-buying last year after a surge in inflation forced it to unwind a decade of stimulus policies. The Bank of England is also selling bonds.

Fixed income markets have been dominated by the question of who will step in to buy government bonds as bond supply rises to meet government debts accrued during the COVID-19 crisis and energy shock following last year’s Russian invasion of Ukraine.

“We have seen a rise of hedge fund activity, which may have replaced or surpassed ECB buying for whatever reason to go into the fixed income market,” Thomas Weinberg, head of trading and issuance at Germany’s debt management agency, said in panel debate at an Association for Financial Markets in Europe’s (AFME) conference in Brussels.

Central banks across the world have increased interest rates since late 2021 to fight inflation and withdrawn from bond-buying programmes aimed at boosting inflation and economic growth.

Weinberg said hedge funds accounted for roughly 40% of turnover in German securities.

Other debt agency officials said regulation following the global financial crisis had prompted banks to be more cautious about investing in bonds, which also left hedge funds with greater scope to buy into fixed income markets.

UK debt management office head Robert Stheeman said hedge funds had moved into the space left by banks in ensuring liquidity – in other words, the ease of buying and selling an asset.

Mercedes Abascal Rojo, head of funding and debt management at the Spanish Treasury, urged the need for caution, however.

“Higher participation can be healthy and excessive participation can be problematic and we have to aware off that,” she said.

So far, market functioning has generally been smooth, the debt agency heads said.

“Overall, we have seen a positive year with no disruption in absorbing higher supply,” Spain’s Abascal said, adding that Spain has seen higher demand for its bonds from non-resident investors.