What keeps you up at night? For the governor of the Bank of England it’s a long list of threats to the UK’s financial system – so let’s take a look at them.

The Bank of England’s latest financial stability report makes for a sobering read. It says “risks to financial stability have increased during 2025” and that “global risks remain elevated and material uncertainty in the global macroeconomic outlook persists.”

So what are these threats?

The Chancellor may have avoided a messy bond market reaction to her Budget, for now, but there’s something else lurking in the deep waters of government debt that has Bank of England officials worried: hedge funds. Specifically, leveraged trading in the gilt repo markets. What’s that? Well, simply put, this refers to the practice of hedge funds and other asset managers arranging short term loans using their holdings of UK government debt as collateral. 

And hedge funds, in fact a small number of US hedge funds, have increasingly taken out enormous bets on small price fluctuations in the UK bond market, which they then borrow against and reinvest to boost returns. The arrangement tends to suit all parties as government debt is seen as a safe bet. 

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