Hedge funds held a record 7% of tradable US Treasurys at end-2025, in a market worth roughly $30 trillion. Regulators warn the leverage behind those positions could amplify turmoil in the Treasury market.
The Office of Financial Research (OFR), a Treasury Department unit, put their cash Treasury holdings at $2 trillion. That is almost triple the level five years earlier.
Why Hedge Funds Are Buying More Treasurys
Pension funds long anchored demand for long-dated government bonds. Meanwhile, the Organisation for Economic Co-operation and Development (OECD) says that appetite fades as pensions shift from fixed payouts.
Hedge funds have stepped in, according to CNBC. Federal Reserve data shows domestic hedge funds bought a net $87 billion of Treasurys in the first half of 2026.
A leading strategy is the cash-futures basis trade. Funds buy Treasurys and sell matching futures, hoping to capture a sliver of price difference between the two.
Because that gap is thin, funds borrow heavily through repurchase agreements (repos), short-term loans backed by Treasurys.
What Could Go Wrong if Hedge Funds Sell Treasurys
Don Steinbrugge, founder and chief executive of Agecroft Partners, says basis trades are often levered 20 times or more.
“As we saw in March 2020, when Treasury market liquidity deteriorated sharply, leveraged funds can be forced to unwind positions quickly.”
Don Steinbrugge, Agecroft Partners, via CNBC
When volatility jumps, lenders can issue margin calls, which are demands for more cash. Funds may then dump Treasurys, pushing prices down and forcing other funds out.
The Federal Reserve’s May report said hedge fund leverage remained near record highs, concentrated among large funds. Likewise, the Bank for International Settlements (BIS), which serves central banks, issued a similar warning earlier this year.
The 10-year yield above 5% hit its highest level since 2007 on Monday. The 30-year touched its highest since 2002 on Tuesday.
Still, Morgan Stanley estimates leveraged basis-trade positions have shrunk by about a fifth this year, to $1.2 trillion.
The Case for Hedge Funds in Treasurys
However, Ken Heinz, president of Hedge Fund Research, says active trading supplies liquidity in both rallies and sell-offs. That could ultimately calm rate swings, he said.
The same funds that smooth trading in calm markets could become forced sellers in a rout. If yields keep climbing, margin calls could test whether leveraged funds can hold their positions.
