According to reports, in the roughly $30 trillion U.S. Treasury market, hedge funds are growing into a force that cannot be ignored. Just as many traditional long-term investors shift toward other assets, hedge funds are stepping in to buy. Experts said in interviews that while this shift has helped find buyers for government debt as the scale of U.S. government borrowing continues to expand, it could also make the world's largest bond market more fragile. Data released last month by the Office of Financial Research under the U.S. Department of the Treasury showed that by the end of 2025, hedge funds' holdings of cash Treasuries reached $2 trillion, nearly tripling from five years earlier. The total amount of marketable Treasuries that can be traded in the secondary market stood at $28.9 trillion, and hedge funds' share of holdings hit a record high of 7%. The latest data from the Federal Reserve shows that hedge funds continued to net buy U.S. Treasuries in the first half of 2026. Domestic 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.
Hedge funds' aggressive positioning in Treasuries comes at a highly sensitive moment for the Treasury market: on Monday, the 10-year U.S. Treasury yield surged to its highest level since 2007; on Tuesday, the 30-year U.S. Treasury yield hit a new high since 2002. Ricky Siao, a hedge fund expert at Union Bancaire Privee, said: "Compared with other types of investors, hedge funds use relatively aggressive leverage, so they may amplify systemic risk." "Once an extreme situation or crisis triggers passive deleveraging, it could set off a broad liquidity crisis and hit financial stability."
A brand-new class of buyers
Traditionally, pension funds have been the main buyers of long-term Treasuries. Their long investment cycles make it easier for them to match future liabilities stretching over decades with assets. But the OECD says structural changes are weakening pension funds' willingness to allocate to long-term Treasuries: defined benefit plans that previously promised fixed payouts are gradually shifting toward defined contribution plans, whose returns depend on investment performance. At the same time, some pension funds are increasing allocations to higher-yielding, less liquid assets such as private credit. Data from Mercer shows that in 2025, institutional investors injected nearly $300 billion into private credit products.
Regulators have also warned about the risks behind rising hedge fund holdings. In its May financial stability report, the Federal Reserve pointed out that hedge fund leverage remains close to historic highs and is highly concentrated among top funds; leveraged trading strategies have built enormous positions in Treasuries and other markets. The Fed said: "Once a fund's financing channels are suddenly cut off, high leverage can trigger risk spillovers." The Bank for International Settlements issued an even sharper warning. Earlier this year, it said the rise of hedge funds as core intermediaries in the Treasury market has created "new financial stability risks." Hedge funds are highly dependent on leverage and short-term repo financing, and once the market shifts, the core bond market is highly vulnerable to sudden deleveraging and market failure.
Hedge funds buying Treasuries is not simply a bet on coupon income. Noah Hamman, founder of AdvisorShares, said: "The logic is completely different. Most pension funds and insurance institutions focus on the long term, with liability matching at the core; hedge funds pursue performance, usually over shorter cycles, with the goal of breaking above high-water marks and beating benchmarks."
Stress test
A large share of hedge fund trading involves relative value strategies aimed at capturing tiny price gaps between highly correlated securities. The most representative is the Treasury cash-futures basis trade: funds buy cash Treasuries while selling corresponding Treasury futures to earn the spread between the two markets. Because the spread between cash and futures is usually extremely small, funds often use high leverage to amplify returns. With repo financing, they can use Treasuries as collateral to build positions several times larger than their own capital. As the Treasury selloff intensifies, there are already signs that hedge funds are becoming more cautious in their trading choices. Morgan Stanley estimates that the size of leveraged Treasury basis trade positions fell by about 20% this year to $1.2 trillion. However, this round of contraction does not mean hedge funds are drastically dumping Treasuries. Fed data shows that as of the second quarter, they were still net buyers of Treasuries. But the contraction is enough to show that leveraged positions can change rapidly with market conditions, and it highlights the risk of disorderly unwinding during periods of market stress.
Don Steinbrugge, founder and CEO of Agecroft Partners, said: "The biggest risk comes from the basis trade. Hedge funds buy cash Treasuries that can be delivered against futures while shorting corresponding Treasury futures. Such trades have thin margins, and leverage often reaches 20 times or even higher." "We saw a similar scene in March 2020: liquidity in the Treasury market deteriorated sharply, and leveraged funds were forced to unwind quickly. That can trigger a vicious cycle of margin calls, forced selling, and further market volatility."
When volatility rises sharply, leveraged hedge funds must either add margin or exit positions. Selling pushes bond prices lower, amplifies losses, and forces more funds to exit. Beyond risk warnings, experts also mentioned the positive role hedge funds play in the Treasury market. Ken Heinz, president of a hedge fund research company, said hedge funds tend to trade continuously rather than hold bonds to maturity like traditional institutions. Whether the market rises or falls, such trading can provide two-way liquidity and ultimately help stabilize rate movements and reduce volatility. So the problem is not that hedge funds themselves harm the Treasury market. In normal environments, their trading can improve liquidity and correct pricing distortions. Steinbrugge said: "When regulators make policy, they should recognize both the market liquidity benefits brought by hedge funds and remain alert to the potential risks of disorderly unwinding. Hedge funds' growing influence in the Treasury market is both a necessary force for maintaining liquidity and a possible source of systemic risk."
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