Hedge funds are becoming a force to be reckoned with in the roughly $30 trillion U.S. Treasury market, stepping in as some traditional long-term investors consider other options.
Experts told CNBC that the shift is helping governments find buyers for their mounting debt piles, but could also make the world’s largest bond market more vulnerable.
The U.S. Bureau of Financial Research announced last month that hedge funds’ cash holdings in Treasurys will reach $2 trillion by the end of 2025, nearly triple the level five years ago. There were $28.9 trillion in marketable Treasury securities traded in the secondary market, with hedge funds having a record 7% share.
More recent Federal Reserve data shows hedge funds continued to be net buyers of U.S. Treasuries in the first half of 2026. Domestic hedge funds made net purchases of $60.6 billion in the second quarter, up from $26.4 billion in the first quarter, bringing their first-half purchases to about $87 billion.
The interest from hedge funds comes at a particularly sensitive time for the U.S. Treasury market, with the 10-year Treasury yield surging to its highest level since 2007 on Monday and the 30-year Treasury yield surging to its highest level since 2002 on Tuesday.
“Hedge funds apply relatively aggressive leverage compared to other types of investors, which can increase systematic risk,” said Ricky Hsiao, a hedge fund specialist at Union Bancare Prive.
“Forced deleveraging due to extreme circumstances or crisis scenarios could lead to broader liquidity and financial stability.”
Pension funds have traditionally been buyers of long-term government bonds because their longer investment horizons allow them to match assets and liabilities for decades into the future.
However, according to the OECD, structural changes such as the move from defined benefit plans, which promise predetermined payments, to defined contribution plans, whose value depends on investment returns, are reducing pension funds’ interest in long-term government bonds.
The shift also comes as some pension funds have increased allocations to higher-yielding, illiquid assets such as private credit. Institutional investors poured nearly $300 billion into private credit vehicles in 2025, Mercer said.
Regulators have also warned of risks associated with increased hedge fund participation. The Fed said in its May Financial Stability Report that hedge fund leverage remains near record highs and is concentrated among large funds, with leverage strategies supporting significant positions in U.S. Treasuries and other markets. “High leverage can have knock-on effects if a fund suddenly loses access to financing,” the Fed said.
The Bank for International Settlements went further, warning earlier this year that the rise of hedge funds as core intermediaries in government bond markets was creating “new financial stability vulnerabilities.” Reliance on leverage and short-term repo financing could further expose core markets to sudden deleveraging and market dysfunction, the report said.
Hedge funds don’t just buy U.S. Treasuries because they like the yield.
“The two are very different, with most pension and insurance companies having very long-term time horizons and a focus on liability matching. Hedge funds are performance-focused, typically focused on short-term high-water marks and returns above the benchmark,” said Noah Hamman, founder of AdvisorShares.
stress test
Much of hedge fund activity involves relative value strategies that aim to take advantage of small price differences between closely related securities. One of the most prominent is the spot futures contract for U.S. Treasury securities. In this trade, a Fund purchases physical U.S. Treasury securities and sells corresponding futures contracts in hopes of profiting from the price difference between the two markets.
Because the difference in prices between the spot and futures markets is typically negligible, the Fund often uses significant leverage to generate attractive returns. Repo financing allows you to borrow against the Treasury as collateral and build a position many times your original capital.
There are already signs that hedge funds are becoming more selective as the sell-off in U.S. Treasuries intensifies. Leveraged U.S. Treasury basis trade positions reportedly fell by about 20% this year to $1.2 trillion, according to estimates from Morgan Stanley.
This pullback doesn’t necessarily mean hedge funds will exit U.S. Treasuries completely, as Fed data shows they remained net buyers throughout the second quarter.
But the withdrawal highlights how quickly leveraged positions can change when market conditions change, highlighting the risk of them being unwound chaotically during periods of stress.
“The biggest risk is basis trading, where hedge funds buy Treasury bonds and at the same time sell futures contracts that can be settled in Treasury bonds,” said Don Steinbrugge, founder and CEO of Agecroft Partners. “These trades have thin margins and can be leveraged up to 20x, if not more.”
“Leveraged funds may be forced to exit positions rapidly, as we saw when U.S. Treasury market liquidity deteriorated sharply in March 2020. This could lead to a vicious cycle of margin calls, forced selling, and further market volatility.”
A spike in volatility could cause leveraged hedge funds to pile on cash or unwind trades. This selling could cause prices to fall, widening losses and forcing other funds to exit.
In addition to expressing concerns, experts also pointed out the constructive role of hedge funds in the US debt market.
Ken Heinz, president of Hedge Fund Research, said hedge funds’ willingness to trade bonds rather than simply holding them to maturity provides two-way liquidity during ups and downs, adding that it could ultimately stabilize interest rate movements and reduce volatility.
So the tension is not that hedge funds are inherently bad for the US Treasury market. Under normal circumstances, their trading increases liquidity and allows price discrepancies to be corrected.
“Regulators should consider the market liquidity benefits offered by hedge funds when making policy decisions, while also being concerned about the potential for disorderly monetary easing,” Steinbrugge said. “The growing role of hedge funds in the U.S. Treasury market is both necessary for liquidity and a potential source of systemic risk.”
