Are Hedge Funds a Hedge for Increasing Government Debt Issuance?

Adam Epp and Jeffrey Gao

No 2025-07, Discussion Papers from Bank of Canada

Abstract: This paper studies the rapid increase since 2019 of Government of Canada (GoC) debt issuance alongside greater hedge fund participation at GoC bond auctions. We find a systematic relationship between GoC debt stock and hedge fund bidding shares at auction. We attribute this to hedge funds’ business models, which are based on volume and leverage. We also use bid-level auction data and find that hedge funds are more willing than other investor types to buy bonds at lower auction yields (higher auction prices). These two results i) help explain why GoC auction performance has remained steady despite greater issuance and ii) affirm the importance of hedge funds in supporting Canada’s cost-effective debt distribution in recent years. In addition, we conduct a counterfactual analysis of the exit of hedge funds from auction, which further affirms the importance of hedge funds to GoC auction performance. However, the concentration of hedge funds represents a potential vulnerability because hedge funds have a greater flight risk relative to domestic real money investors and thus contribute to a potentially less stable investor base.

Keywords: Debt management; Financial markets; Financial institutions; Financial stability (search for similar items in EconPapers)
JEL-codes: D44 G12 G2 G23 H63 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2025-05
New Economics Papers: this item is included in nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocadp:25-07

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