Major Wall Street dealers are returning to the U.S. Treasury market at the largest scale since the financial crisis, but this seemingly positive shift cannot obscure the accumulating leverage risks on the other side—the extremely leveraged positions of hedge funds have become the most significant vulnerability in the market structure.
According to calculations by the Financial Times based on New York Federal Reserve data, the average net Treasury holdings of primary dealers have risen to approximately $550 billion this year, accounting for nearly 2% of the overall market, the highest proportion since 2007.
The core driver of this change is the revision of the enhanced Supplementary Leverage Ratio (eSLR) rule—promoted during the Trump administration to relax non-risk-adjusted capital requirements for large banks, directly enabling banks to resume market-making activities in Treasuries.
On the other hand, Torsten Slok, Chief Economist at Apollo Global Management, warns that hedge funds' share of the $31 trillion U.S. Treasury market has surged to a record 8%, supported by over $6 trillion in repurchase agreements and prime broker financing. He cautions that if highly leveraged positions are forced into concentrated unwinding, it "could send shockwaves through global fixed-income markets," subsequently impacting equities, corporate bonds, mortgages, and other markets.
The improvement in bank holdings coexists with the leverage risks posed by hedge funds, forming the core contradiction in the current U.S. Treasury market. Debate continues over whether the market structure is repairing itself or accumulating systemic risks in a new form.
Regulatory easing has opened space for banks to hold Treasuries.
Following the 2008 financial crisis, stringent capital regulations led large banks to gradually retreat from their core role as market makers in U.S. Treasuries. Now, this trend is quietly reversing.
The revision of the eSLR rule was advanced under the leadership of Federal Reserve supervision committee chair Michelle Bowman, appointed by President Trump. Morgan Stanley confirmed this month that it has deployed additional capital for Treasury trading, leveraging the SLR revision. Mark Cabana, Head of U.S. Rates Strategy at Bank of America, noted, "Dealer Treasury holdings have clearly increased over the past few months, evidence that the SLR is indeed having an impact."
Data from Coalition Greenwich shows that the six systemically important banks previously held capital averaging 2.4 percentage points above regulatory requirements. Minal Chotai, the firm’s Global Head of Capital Analysis, pointed out that with the adjustment of capital rules, "the rationale for maintaining these huge excess buffers has disappeared," implying that more capital could be released into trading activities.
Hedge funds have quietly become the largest foreign holders of U.S. debt.
Over the past decade, as traditional market makers withdrew, hedge funds have quietly filled the core role in the U.S. Treasury market.
According to data from the U.S. Office of Financial Research, by the end of 2025, hedge funds held $2.4 trillion in long Treasury positions and $1.6 trillion in short positions, nearly triple the level from three years prior. Federal Reserve economists also noted that official TIC data underestimates hedge funds’ cross-border holdings by as much as $1.4 trillion—after adjustment, hedge funds registered in the Cayman Islands are actually the largest foreign holders of U.S. Treasuries, with holdings significantly exceeding those of China, Japan, and the United Kingdom. Between 2022 and 2024, hedge funds absorbed 37% of the net issuance of medium- and long-term U.S. Treasuries, "almost equivalent to the total of all other foreign investors."
This expansion has been primarily driven by "basis trading"—a strategy that exploits price differences between Treasury cash and futures, amplified by high leverage. The strategy yields extremely thin profits and is highly dependent on stable financing conditions. During the bond market turmoil in 2020, the Federal Reserve had to intervene directly to stabilize a market disrupted by the rapid unwinding of hedge fund positions.
Structural changes are difficult to reverse, with refinancing pressure looming.
Market participants are divided in their assessment of this structure.
Jay Barry, Global Head of Rates Strategy at J.P. Morgan, stated bluntly, "Primary dealers will not return to their pre-2008 role; the trend of hedge funds and high-frequency traders occupying a larger share is irreversible."
Molly Brooks, Rates Strategist at TD Securities, pointed out that if volatility declines or the Federal Reserve significantly cuts interest rates, hedge funds may voluntarily reduce their positions—raising the unresolved question of who would step in as buyers. Yesha Yadav, a professor at Vanderbilt Law School, warned that since banks have no legal obligation to make markets, "rolling back these balance sheet rules does not guarantee success." Ajay Rajadhyaksha, Global Research Chair at Barclays, also believes that while increased bank holdings are related to regulatory changes, structural constraints have not been fundamentally eliminated.
Against this backdrop, the U.S. Treasury’s refinancing pressure is a definite constraint: next year, debt equivalent to 33% of the total outstanding U.S. Treasury market will mature, requiring approximately $10 trillion in new issuance to be rolled over. Meanwhile, non-U.S. central banks have collectively sold over $82 billion in Treasuries, reducing their holdings to the lowest level since 2012. Former Treasury Secretary Henry Paulson recently called on policymakers to develop contingency plans in advance to prepare for extreme scenarios of demand collapse. As of Friday's close, the 10-year Treasury yield stood at 4.24%.
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