MNI BRIEF: Hedge Funds Buying 40% Of New Canadas Is Risky- BOC

Hedge funds are buying about 40% of bonds at Government of Canada auctions and that poses a risk of market instability if there is any quick exit, central bank researchers wrote in a paper published Friday.

The share of purchases by hedge funds has climbed from close to nothing in 2010 and making them the largest investor class after dealers according to the paper, which builds on earlier research and concerns expressed by officials such as Senior Deputy Governor Carolyn Rogers. 

"Their increased participation in auctions could strain the capacity of the balance sheets of dealers’ repurchase agreements," even as its "supports the cost-effective distribution of Canada’s domestic debt," the paper said. (See: MNI: Carney Deficits Are Bulwark Against Big Macklem BOC Cuts)

"In 2024, the Canadian Overnight Repo Rate Average (CORRA) persistently rose several basis points above the Bank’s target for the overnight rate. This indicated that hedge funds were holding large, leveraged long bond positions. But the opposite was seen with short positions in 2023," the paper found.