Bank of Canada Governor Macklem warns hedge funds could destabilize sovereign debt markets

When hedge funds start dominating the market for government bonds, the people who run central banks tend to lose sleep. Bank of Canada Governor Tiff Macklem is now making that anxiety public.

In a March 2026 address, Macklem flagged a trend that should concern anyone paying attention to financial stability: hedge funds now account for as much as 50% of Government of Canada bond purchases at auction. That’s not a rounding error. That’s half the sovereign debt market being absorbed by entities running highly leveraged strategies funded through short-term repurchase agreements.

The repo problem, explained

Here’s the thing about how hedge funds operate in sovereign debt markets. They don’t typically buy government bonds with their own money and sit on them. Instead, they use repos, short-term borrowing arrangements where they pledge the bonds as collateral and roll the funding over daily or weekly. Macklem’s concern is that when stress hits, these funds could be forced to sell their bond holdings rapidly, flooding the market with supply at exactly the wrong moment. The speed and size of hedge fund trades make these potential unwinds particularly dangerous, according to Macklem.

The Bank of Canada’s 2026 Financial Stability Report reinforced these numbers. Hedge funds accounted for over 40% of government-bond auction purchases, while approximately one-quarter of dealer-to-client trading involved hedge funds.

Central clearing as the fix

The Bank of Canada announced plans to implement central clearing for its repo operations, with a target rollout in early 2027. Central clearing essentially inserts a clearinghouse between the two sides of every repo transaction, reducing the risk that one party’s failure cascades through the system.

Macklem reiterated these concerns in a follow-up speech in Paris on June 23, 2026, emphasizing the fragility that leveraged hedge-fund strategies introduce to core sovereign debt markets.

The broader backdrop here matters too. Private credit markets have expanded rapidly, and valuations across multiple asset classes look stretched. The combination of highly leveraged positioning in sovereign debt and wider market frothiness creates a setup where a single disorderly event could trigger ripple effects across the financial system.

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