Record Hedge Fund Holdings in Treasurys Raise Alarm

Hedge funds have significantly expanded their presence in the U.S. Treasury market, holding a record 7% of marketable debt, totaling $2 trillion by the end of 2025. This represents a near tripling of their holdings over five years.

This growing involvement comes as traditional investors like pension funds shift away from long-dated government bonds. Structural changes in retirement plans and increased allocations to alternative assets contribute to this trend, creating an opportunity for hedge funds to step in.

Regulators, including the Federal Reserve and the Bank for International Settlements, have voiced concerns about the potential financial stability risks posed by hedge funds' high leverage and reliance on short-term financing. These practices could amplify market turmoil during crisis scenarios.

While hedge funds provide essential liquidity through active trading, their aggressive strategies, particularly the Treasury cash-futures basis trade, can lead to rapid deleveraging and exacerbate market volatility, as seen in past events.