Key points: By the end of 2025, hedge funds held a record 7% of tradable U.S. Treasuries. Regulators warn that high leverage and basis trades could amplify turbulence in the Treasury market. Hedge funds can enhance Treasury market liquidity, but their growing influence may also breed financial instability.

As some traditional long-term investors shift toward other assets, hedge funds are becoming a force that cannot be ignored in the roughly $30 trillion U.S. Treasury market. Experts say this shift has helped find buyers for U.S. government debt as its issuance continues to expand, but it could also make the world's largest bond market more fragile.

Data from the Office of Financial Research last month showed that the scale of spot Treasuries held by hedge funds has reached nearly three times the level of five years ago. The outstanding stock of tradable Treasuries that can be traded in the secondary market stands at $28.9 trillion, and hedge funds' share of holdings has hit a record high of 7%. Federal Reserve flow of funds data show that hedge funds continued to net buy Treasuries in the first half of 2026. U.S.-based hedge funds net bought $60.6 billion in the second quarter, up from $26.4 billion in the first quarter, for a total of about $87 billion in the first half.

The heavy positioning by hedge funds in Treasuries comes at a highly sensitive time for the Treasury market: the 10-year Treasury yield surged on Monday to its highest since 2007, and the 30-year Treasury yield touched its highest since 2002 on Tuesday. Ricky Siao, a hedge fund specialist at a Swiss private bank, said: "Compared with other types of investors, hedge funds use relatively aggressive leverage, so they may amplify systemic risk." "Once extreme market conditions or a crisis scenario triggers forced deleveraging, it could lead to a broad liquidity crisis and a financial stability event."

A new class of buyers

Traditionally, pension funds have been buyers of long-term Treasuries. These institutions have long investment horizons and can match long-duration assets against liabilities stretching over decades. But structural changes are eroding pension funds' interest in long-term Treasuries: pension systems are gradually shifting from defined benefit plans, which promise fixed payouts, to defined contribution plans, where returns depend on investment performance. At the same time, some pension funds are increasing allocations to higher-yielding, less liquid private credit assets. Data from Mercer showed that institutional investors put nearly $300 billion into private credit products in 2025.

Regulators have also warned about the risks brought by hedge funds' deep participation. In its May 2026 Financial Stability Report, the Federal Reserve noted that hedge fund leverage is near historical highs and concentrated in large funds; such leveraged strategies hold large positions in Treasuries and other markets. The Fed said: "If funds suddenly lose access to financing, high leverage creates spillover risks." The Bank for International Settlements went further earlier this year, warning that hedge funds' growth into core intermediaries in the Treasury market has created "new weak points for financial stability." Hedge funds are highly dependent on leverage and short-term repo financing, and once market turmoil occurs, core markets are more vulnerable to concentrated deleveraging and market dysfunction.

Hedge funds buy Treasuries not simply because they are bullish on coupon income. Noah Hamman, founder of AdvisorShares, said: "They are completely different from pension funds and insurance institutions. Most pension funds and insurers focus on the ultra-long term, with the core goal of liability matching; hedge funds pursue performance, usually over shorter cycles, keep a close eye on high-water marks, and aim to beat benchmarks."

Stress test

Many hedge fund trades use relative value strategies, profiting from tiny price differences between highly correlated securities. The best known is the Treasury cash-futures basis trade: funds buy spot Treasuries while selling corresponding Treasury futures, earning the spread between the two markets. Because the spread between cash and futures is usually extremely small, funds often use large amounts of leverage to seek meaningful returns. Repo financing allows funds to borrow money using Treasuries as collateral, building positions several times larger than their own capital.

As the Treasury selloff intensifies, there are already signs that hedge funds are becoming more cautious. Morgan Stanley estimates that leveraged Treasury basis trade positions fell about 20% this year to $1.2 trillion. The contraction in positions does not mean hedge funds are directly liquidating Treasuries; Fed data show they remained net buyers in the second quarter. But the contraction shows that leveraged positions can be adjusted quickly once the market environment changes; it also highlights the risk of disorderly unwinding during periods of market stress.

Don Steinbrugge, founder and chief executive of Agecroft Partners, said: "The biggest risk comes from the basis trade — hedge funds simultaneously buy Treasury cash bonds and sell Treasury futures contracts that can be settled with those bonds. The profit on such trades is extremely thin, and leverage often reaches 20 times or even higher." "As we saw in 2020, when Treasury market liquidity deteriorates sharply, leveraged funds are forced to unwind quickly, triggering a vicious cycle of margin calls, forced selling, and further market volatility."

When volatility rises sharply, leveraged hedge funds need to meet margin calls or exit positions. Selling pushes bond prices lower and magnifies losses, forcing more funds out of the trade. Beyond the risks, experts also point to hedge funds' positive role in the Treasury market. Ken Heinz, president of a hedge fund research firm, said: hedge funds are mainly traders rather than simply holding bonds to maturity, and they can provide two-way liquidity in both rising and falling markets, ultimately helping stabilize interest rate moves and reduce volatility.

So the issue is not that hedge funds themselves are harmful to the Treasury market. Under normal conditions, their trading can improve liquidity and correct pricing distortions. Steinbrugge said: "When regulators set policy, they should assess both the market liquidity benefits brought by hedge funds and the potential risks of disorderly unwinding. Hedge funds' growing position in the Treasury market is on the one hand necessary for market liquidity, and on the other may become a source of systemic risk."