Hedge funds hold a record share of the $30 trillion Treasury market. What could go wrong? — SkimNews
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- Hedge funds held $2 trillion in cash Treasuries at the end of 2025, a record 7% share of the $28.9 trillion marketable Treasury market — nearly triple their level from five years earlier, per the U.S. Office of Financial Research.
- Federal Reserve data shows domestic hedge funds remained net buyers through the first half of 2026, purchasing $87 billion in Treasurys ($60.6 billion in Q2 alone, up from $26.4 billion in Q1).
- The Treasury cash-futures basis trade — often levered 20 times or higher, per Agecroft Partners' Don Steinbrugge — has seen leveraged positions fall roughly 20% this year to $1.2 trillion, according to Morgan Stanley estimates.
- The 10-year Treasury yield hit its highest level since 2007 and the 30-year reached its highest since 2002, as hedge funds grew more selective during the sell-off.
- Pension funds are pulling back from long-dated government bonds amid the shift from defined-benefit to defined-contribution plans, while institutional investors poured nearly $300 billion into private credit vehicles in 2025 per Mercer.
- Both the Federal Reserve (May financial stability report) and the Bank for International Settlements warned that hedge funds' reliance on leverage and short-term repo financing creates "new financial stability vulnerabilities" and spillover risk.
Why it matters: Hedge funds now fill a buyer vacuum left by pension funds exiting long-dated bonds — but their 20x-leveraged basis trades create disorderly unwind risk during sell-offs. With the Fed, BIS, and Morgan Stanley all flagging concentration in $1.2 trillion of basis-trade positions, regulators face a tradeoff between liquidity provision and systemic risk during market stress.
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