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What do the record share and rising purchases show?

Hedge funds are gaining an increasingly large foothold in the roughly $30 trillion U.S. Treasury market. According to data from the U.S. Treasury Department’s Office of Financial Research, these funds’ cash Treasury holdings reached $2 trillion at the end of 2025. With the total amount of Treasury debt traded in the secondary market standing at $28.9 trillion, hedge funds’ share hit a record 7%.

More recent data from the Federal Reserve (Fed) show the trend continued into 2026. Domestic hedge funds bought a net $60.6 billion of Treasuries in the second quarter of the year; combined with $26.4 billion of purchases in the first quarter, first-half buying came to about $87 billion. The figures came during a sensitive period, with the 10-year Treasury yield hitting its highest level since 2007 and the 30-year yield reaching its highest since 2002 earlier in the week.

Why is the traditional investor base shrinking?

Investment preferences among pension funds, once classic buyers of long-dated government bonds, have shifted in recent years. According to the Organisation for Economic Co-operation and Development (OECD), the move from plans with fixed payout commitments to market-linked plans has reduced appetite for long-term government debt.

At the same time, some institutional investors are moving into less liquid assets in search of higher returns. Mercer data show nearly $300 billion flowed into private credit vehicles in 2025.

  • Weaker demand from pension funds needing duration matching is reducing demand for long-dated Treasuries.
  • Capital shifting into higher-yielding areas such as private credit is narrowing the traditional buyer base in the bond market.

What risk is leverage adding to the market?

Experts say the core risk lies in the relative-value trades often used by hedge funds. The best-known example is the basis trade, in which an investor buys cash bonds while selling futures contracts against them. Because the price gap between the cash bond and the futures market is very small, these strategies are often financed through repo funding and high leverage.

Vulnerabilities flagged by regulators

In its May financial stability report, the Fed said hedge fund leverage remained near record levels and was concentrated in large funds. The Bank for International Settlements (BIS) has also warned that hedge funds’ growing role as a kind of prime broker in government bond markets is creating new financial stability vulnerabilities.

According to Morgan Stanley estimates, leveraged basis-trade positions fell by about 20% this year to $1.2 trillion. While that pullback does not mean funds have exited bonds altogether, it shows how quickly leveraged positions can unwind when market conditions worsen. Analysts note that leverage in some trades can exceed 20 times and warn that, as seen in March 2020, a deterioration in liquidity could trigger a wave of forced selling.

Even so, hedge funds also provide benefits to the market. By actively buying and selling bonds rather than simply holding them to maturity, they can supply two-way liquidity in both rising and falling markets. The debate, therefore, is less about whether hedge funds should be in the market and more about how to balance the liquidity they provide against the systemic risks they carry.

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