To The Moon

The US government is finding itself increasingly dependent on investors who only buy when the price is right, hemmed in by a Treasury sell-off that has pushed benchmark yields to multi-decade highs.

The composition of who dominates the world's largest bond market is evolving — over the past two decades, fueled by heavy federal borrowing, the market has expanded sevenfold to reach $32 trillion.

What has declined in relative importance are foreign governments, central banks and pension funds. These buyers are less reflexively price-sensitive and have historically absorbed large amounts of what is traditionally considered risk-free securities. While some of these institutions intend to trim holdings, they typically hold Treasuries for the long term. Call them "slow money."

Central bank retreat opens space for more "fast money" buyers

Meanwhile, the footprint of private investors is widening. They hold roughly 70% of federal debt, close to the highest level since 1990.

And nearly one-tenth of the Treasury market belongs to hedge funds — which have other assets to choose from and whose use of leverage to arbitrage market dislocations has drawn regulatory attention over financial stability risks. In the pursuit of returns, these investors turn and leave at the slightest hint of trouble. They are "fast money."

For Treasury Secretary Bessent and Federal Reserve Chair Kevin Warsh, among others, the concern is this: should these price-sensitive buyers suddenly panic over monetary policy, the economic trajectory, widening US deficits or any single presidential executive order, the influence they wield will be greater than ever before.

True, the US government can still find creditors to finance its spending, but these investors are less reliable — and their fickleness is helping push yields higher.

In the view of Anshul Pradhan, head of US rates strategy at Barclays, this behavior reveals America's true cost of money. "The investor base has become more discerning," he said. "A market with a large number of price-insensitive buyers can absorb supply with relatively small adjustments; a market reliant on private capital may need to make larger concessions."

Against the backdrop of this year's bond sell-off, the significance of this shift is even greater. While this repricing was mainly driven by global factors — such as surging oil prices and an improved growth outlook — it has reignited concerns about US fiscal policy while also driving up borrowing costs for companies and individuals.

US Treasury yields hit near 25-year highs

An Australian state-level fund said last year it was reducing Treasury holdings out of concern over President Trump's tariff and tax plans. And in September, Norges Bank Investment Management, a division of Norway's central bank, proposed cutting its sovereign bond holdings, saying other fixed-income assets offer better risk-adjusted returns.

At the same time, companies are issuing debt at a record pace to finance the development of artificial intelligence and its supporting infrastructure — a bet that has fueled stock market fervor. Unlike foreign central banks, which typically buy Treasuries to manage national reserves and exchange rates, private investors are more inclined to sell Treasuries and hold corporate bonds or equities instead.

Meanwhile, the Federal Reserve is no longer continuously buying bonds as part of quantitative easing programs aimed at boosting the economy. Paul Donovan, chief economist at UBS Global Wealth Management, said, "As investors, central bank officials are less volatile, partly because the range of assets they can buy is more restricted. The fickle, less constrained private sector has expanded its influence in the bond market."

The retreat of central banks — often seen as among the least price-sensitive buyers — has made room for depository institutions, hedge funds and other relatively more price-sensitive investors. Bloomberg Economics estimates that the decline in Fed and foreign official holdings once added about 105 basis points to the term premium — the extra return investors demand for the risk of holding 10-year Treasuries rather than rolling over short-term securities over the same period.

Another key source of long-term bond demand may be fading: corporate pension fund managers now have enough money to pay retirees and have often closed to new members. According to the Milliman 100 Pension Funding Index, corporate pensions overall had about 114% of required funding as of September; those accounts were only 82% funded in July 2020.

As they profit in the stock market, they have an incentive to limit risk by shifting into bonds — whose expected income can closely match their future liabilities to retirees.

Many US pension funds are now fully funded

Jason Williams, rates strategist at Citigroup, said weakening pension fund demand could prompt the US Treasury to reduce long-term bond issuance and instead increase short-term bill issuance. Stephen Douglas, chief economist at NISA Investment Advisors, said, "The trend for corporate defined-benefit pensions has been to freeze or close. The result is you're no longer accumulating new liabilities far off in the future."

Fed researchers have noted the rise in hedge fund Treasury holdings: between 2012 and 2025, these funds quadrupled their holdings, accounting for nearly one-fifth of their assets. They have absorbed Treasuries faster than other US creditors, and by the end of last year, hedge funds held about 8.5% (roughly $2.7 trillion) of outstanding Treasuries.

Hedge funds' growing share of the Treasury market

Given that hedge funds can act quickly, leverage their trades and sell Treasuries with great flexibility, this figure is particularly striking.

Some hedge fund trades exploit the relative value of spreads between comparable interest rates in the market. Typical examples include the "basis trade" and "swap spreads." Macro hedge funds also bet on the direction of yields.

Hedge funds play the role of intermediaries in the complex Treasury ecosystem

Steven Blitz, managing director at TS Lombard, said, "Leveraged buyers boost demand, keeping yields from rising too high," referring to these funds' activity in swap spreads and basis trades. But "once repo rates spike sharply, these positions get unwound, triggering a flood of Treasury selling."

To illustrate the potential threat from hedge fund positioning, market participants, regulators and the Fed all point to March 2020 — when, on the eve of pandemic lockdowns, investors rushed to sell bonds for cash. That sell-off hit hedge funds' basis trade positions and exacerbated market volatility.

But in recent months, the size of this trade has been shrinking, suggesting this leveraged strategy is not currently a source of concern.

The basis trade unravels in March 2020

Still, the trade highlights the divide between "fast money" strategies and those of major central banks like the Fed — especially as price-sensitive investors account for a growing share of the market.

The TS Lombard team led by Alexandros Xenophontos wrote, "Global bond markets are adapting to a less forgiving buyer base. Governments will still finance themselves, but increasingly at prices set by more autonomous decision-making investors."