Hedge funds have increased their share of the U.S. Treasury market to a historic peak, leveraging more than $6 trillion in borrowed funds, raising concerns about underlying risks.
On April 17, Torsten Slok, chief economist at Apollo Global Management, revealed in a research report that hedge funds’ share of the $31 trillion U.S. Treasury market recently rose to 8%, a record high.
Slok warned that these positions are heavily reliant on borrowed money, supported by over $6 trillion in repo agreements and prime brokerage financing. If market volatility forces these highly leveraged positions to unwind simultaneously, it could "send shockwaves through global fixed-income markets."
The U.S. Treasury market serves as the pricing foundation for the global financial system. Any sharp fluctuations would quickly ripple through equities, corporate bonds, mortgage markets, and various financing channels.
A key strategy driving hedge funds’ large-scale participation in the Treasury market is the "basis trade"—a tactic that exploits small price differences between cash Treasuries and futures contracts using high leverage.
This strategy offers extremely thin profit margins, requiring substantial borrowing to generate meaningful returns. As a result, if market volatility increases or financing conditions tighten, holders may be forced to rapidly unwind positions, triggering a cascade effect.
Notably, Federal Reserve economists have previously indicated that official data may understate hedge funds’ actual involvement in the Treasury market, suggesting that the true risk exposure could be larger than reported.
Not all analysts believe a crisis is imminent.
Molly Brooks, a rates strategist at TD Securities, suggested that the rising share of hedge fund holdings reflects market conditions over the past two years—higher yields and volatility have made Treasuries more attractive to fast-moving investors, rather than signaling an impending crisis.
However, Brooks also highlighted a deeper concern: If hedge funds decide to exit due to diminished arbitrage opportunities, who will absorb their holdings?
She noted that if volatility subsides and the Fed cuts interest rates more than expected, reducing yield appeal, hedge funds may voluntarily scale back their positions. In that scenario, other buyers would be needed to digest Treasury supply.
William Merz, head of capital markets research at U.S. Bank Asset Management Group, placed this trend in a broader historical context.
He pointed out that after the 2008 global financial crisis, stricter regulations limited the ability of large banks and dealers to absorb Treasury supply using their own capital, shifting this role increasingly to non-bank institutions like hedge funds.
As a result, the market may be more prone to periodic volatility. Still, Merz emphasized that this structural shift has not fundamentally altered the medium- to long-term pricing of Treasuries, nor does it indicate a collapse in overall demand.
He also noted that individual investors and mutual funds have steadily increased their holdings of U.S. Treasuries. Despite occasional discussions about "selling U.S. assets," this trend has not yet materially appeared in ownership data.
These concerns are not isolated. Just one day before Slok’s report, former Treasury Secretary Henry Paulson publicly urged policymakers to develop contingency plans for an extreme scenario where demand for U.S. debt collapses.
As of Friday’s close, the 10-year Treasury yield fell 6.5 basis points to 4.24%, as investors grew more optimistic about easing tensions with Iran.
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