Hedge fund holdings of US Treasuries rose to two trillion dollars at the end of 2025, nearly three times their level five years earlier, according to data from the US Office of Financial Research. The funds accounted for about 7% of marketable debt, a record level.
Federal Reserve data showed that hedge funds remained net buyers of bonds in the first half of 2026, purchasing 87 billion dollars’ worth, including 60.6 billion dollars in the second quarter.
The growing role of hedge funds in the US Treasury market, valued at about 30 trillion dollars, came as the 10-year Treasury yield rose to its highest level since 2007 and the 30-year yield climbed to its highest level since 2002.
Traditional buyers’ role declines
Pension funds have gradually reduced their reliance on long-term government bonds, driven by structural changes in pension systems and a shift toward plans whose returns are linked to investment performance rather than predetermined benefits.
Some financial institutions have also increased their exposure to higher-yielding, less-liquid assets, including private credit, which attracted nearly 300 billion dollars in investment during 2025, according to Mercer data.
Ricky Xiao, a hedge fund specialist at Union Bancaire Privée, warned that hedge funds’ reliance on higher levels of leverage than other investor groups could amplify systemic risks. He said forced deleveraging during crises could affect liquidity and financial stability more broadly.
The Federal Reserve said hedge fund leverage remained near record levels, warning that a sudden loss of funding sources could transmit pressure to other markets. The Bank for International Settlements said the rise of these funds as major intermediaries in government bond markets had created new vulnerabilities because of their heavy reliance on borrowing and short-term funding.
The basis trade and leverage
Hedge funds rely heavily on strategies targeting small price discrepancies between bond-related instruments. One of the most prominent is the basis trade, in which funds buy cash bonds and sell corresponding futures contracts in an effort to profit from the price gap between the two markets.
Narrow price spreads have prompted funds to use high leverage to enhance returns, relying on repurchase agreements, or repos, to build positions several times larger than their actual capital. Morgan Stanley estimates showed that positions in this strategy declined by about 20% during the current year to 1.2 trillion dollars, as the bond sell-off continued.
Don Steinbrugge, founder of Agecroft Partners, said the main risks were concentrated in basis trades because they rely on thin profit margins and can involve leverage of 20 times or more.
Steinbrugge added that the experience of March 2020 showed that deteriorating liquidity in the bond market could force indebted funds to liquidate their positions quickly, creating an accelerating cycle of margin calls, forced selling and price volatility.
Additional liquidity and systemic risks
At the same time, hedge funds provide liquidity to the market through active trading rather than holding bonds to maturity, helping absorb buying and selling pressures and supporting pricing efficiency.
Ken Heinz, president of Hedge Fund Research, said this activity could help stabilize interest-rate movements and curb volatility over the long term. Nevertheless, the market’s growing reliance on hedge funds remains a potential source of systemic risk if they are forced to unwind their debt-financed positions suddenly.
