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Hedge funds held a record 7% of marketable Treasurys as of end-2025. Regulators warn high leverage and basis trades could amplify Treasury market turmoil. Hedge funds can boost Treasury market liquidity, but their growing role also risks creating financial instability.
Hedge funds are becoming a force to be reckoned with in the roughly $30 trillion U.S. Treasury market, stepping in at a time when some traditional long-term investors have been looking at other options.
The shift is helping the government find buyers as its pile of debt grows, but it may also be making the world's largest bond market more vulnerable, experts told CNBC.
Hedge funds' cash Treasury holdings reached $2 trillion at the end of 2025, nearly three times their level five years earlier, the U.S. Treasurys Office of Financial Research said last month. Marketable Treasury debt — which is traded in the secondary market — was $28.9 trillion, putting hedge funds' share at a record 7%.
More recent Federal Reserve data shows hedge funds remained net buyers of Treasurys in the first half of 2026. Domestic hedge funds bought a net $60.6 billion in the second quarter, up from $26.4 billion in the first, bringing first-half purchases to about $87 billion.
The interest from hedge funds comes at a particularly sensitive time for the Treasury market, with the 10-year yield surging to its highest level since 2007 on Monday and the 30-year soaring to the highest since 2002 on Tuesday.
"Hedge funds apply relatively aggressive leverages as compared to other types of investors and therefore may magnify systematic risk," said Ricky Siao, a hedge fund specialist from Union Bancaire Privée.
"When forced deleveraging happens due to extreme situations or crisis scenarios, it may result in broader liquidity and financial stability event." A different kind of buyer
Pension funds have traditionally been buyers of long-dated government bonds because the extended investment horizons allow them to match assets against liabilities stretching decades into the future.
But structural changes, including the migration from defined-benefit plans that promise a predetermined payout to defined-contribution plans whose value depends on investment returns, are reducing pension funds' interest in long-term government bonds, according to the OECD.
Hedge funds held a record 7% of marketable Treasurys as of end-2025.