By Marc Jones

LONDON (Reuters) -The new head of the Bank for International Settlements has said reining in hedge funds’ ability to make highly leveraged bets in government bond markets should be a key priority for policymakers given rapidly increasing public debt levels.

Pablo Hernández de Cos, who took over as General Manager of the umbrella body for central banks in July, said the combination of high debt and growing role of non-bank financial institutions (NBFIs) such as hedge funds in bond markets posed new financial stability risks.

The worry is their use of leveraged “relative value” trades like cash-futures basis trades, which look to exploit small price differences between bonds and their futures contracts.

These strategies have boomed in the U.S. and other major economies but

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