Hedge Funds Reach Record Share in $30 Trillion U.S. Treasury Market, Regulators Warn of Deleveraging Risks

On September 30, hedge funds increased their share in the approximately $30 trillion U.S. Treasury market to a historic high, becoming an increasingly important buyer as some traditional long-term investors reduce their allocations. Data from the U.S. Treasury Department's Office of Financial Research shows that by the end of 2025, hedge funds are expected to hold $2 trillion in cash U.S. Treasuries, about three times the amount five years ago, accounting for 7% of the $28.9 trillion in tradable U.S. Treasuries, marking a record high. The latest data from the Federal Reserve also indicates that in the first half of 2026, U.S.-based hedge funds continued to net buy U.S. Treasuries, with net purchases of $26.4 billion and $60.6 billion in the first and second quarters, respectively, totaling approximately $87 billion.

As hedge funds increase their allocations, the demand for long-term U.S. Treasuries from traditional long-term investors such as pension funds is weakening. The OECD points out that the shift from defined benefit plans to defined contribution plans in pension systems, along with some pension funds increasing allocations to high-yield, low-liquidity assets like private credit, has altered the investor structure in the U.S. Treasury market. In 2025, institutional investors are expected to invest nearly $300 billion in private credit instruments.

One of the main strategies of hedge funds is basis trading between cash U.S. Treasuries and futures, which involves buying cash U.S. Treasuries and selling corresponding futures to profit from the small price differences between the two. Due to the thin profit margins, such trades typically rely on repurchase financing, with leverage ratios reaching up to 20 times or even higher. Morgan Stanley estimates that as the sell-off of U.S. Treasuries intensifies, related leveraged positions have decreased by about 20% this year to $1.2 trillion.

The Federal Reserve and the Bank for International Settlements warn that hedge funds' reliance on high leverage and short-term financing could trigger margin calls, forced selling, and rapid deleveraging during periods of increased market volatility, creating a vicious cycle of falling prices and deteriorating liquidity. However, the frequent trading by hedge funds can also provide two-way liquidity to the market and correct pricing discrepancies, thus their role in the U.S. Treasury market has both liquidity support and systemic risk aspects.

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