Hedge funds bridging the bond-buying liquidity gap in Europe LeapRate

Purportedly, debt agency heads from prominent issuers in Europe said hedge funds help to bridge the buying gap created by central banks in government bond markets. These include the European Central Bank and the Bank of England, which both curbed bond-buying activities in the wake of surging inflation.

Recently, fixed-income markets focused on who will buy government bonds as the supply increased to address debts that piled up during the pandemic and the energy dilemma following the Ukraine war. Globally, central banks have been increasing interest rates to tackle inflation.

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At the same time, these leading financial institutions withdrew from bond-buying programmes, directly impacting economic growth. At the Association for Financial Markets in Europe (AFME) conference in Brussels, Thomas Weinberg, head of trading and issuance at a German debt management agency, commented:

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.

He further added that hedge funds make up an estimated 40% of turnover in German securities. Other debt agency officials at this conference said banks are more careful about bond investments in light of the ongoing financial crisis.

According to Reuters, the UK debt management office head, Robert Stheeman, feels hedge funds filled this gap and ensure the liquid flow of buying and selling assets. However, Mercedes Abascal Rojo, the Spanish Treasury head of funding and debt management, cautioned:

Higher participation can be healthy and excessive participation can be problematic and we have to be aware of that.