Hedge funds have accumulated a record share of the U.S. Treasury market, stepping in as some traditional long-term investors pull back, even as regulators warn that their reliance on leverage could amplify instability during periods of stress.
According to the U.S. Office of Financial Research, as cited by CNBC, hedge funds held $2 trillion in cash Treasurys at the close of 2025. That figure is nearly three times their level five years earlier. Against a marketable Treasury debt total of $28.9 trillion, that translated to an all-time high share of 7% for hedge funds.
More recent Federal Reserve data shows the buying continued into 2026. Domestic hedge funds were net buyers of $26.4 billion worth of Treasurys in the opening quarter of 2026 and $60.6 billion in the quarter that followed, putting their total net intake for the first half at around $87 billion.
The trend coincides with a broad retreat by pension funds from long-dated government bonds. According to the OECD, as cited by CNBC, the industry-wide move away from defined-benefit plans and toward defined-contribution arrangements has steadily eroded the case for pension funds to carry large allocations of long-duration Treasurys. Institutional investors also directed nearly $300 billion into private credit vehicles during 2025, Mercer data showed.
Regulators have flagged the risks that come with hedge funds filling that gap. In its May financial stability report, the Federal Reserve noted that leverage among hedge funds was still hovering near record levels and was concentrated at the largest firms. “High leverage can lead to spillovers if the fund suddenly loses access to funding,” the Fed said. The Bank for International Settlements cautioned that hedge funds’ growing role as central participants in government bond markets has introduced fresh vulnerabilities to financial stability, as their dependence on leverage and short-term repo financing leaves markets increasingly susceptible to abrupt deleveraging, according to CNBC.
A large portion of hedge funds’ Treasury activity centers on relative-value strategies, notably the cash-futures basis trade — an approach where funds purchase cash Treasurys and simultaneously short the equivalent futures contracts, profiting from minor pricing gaps between the two. The spreads involved are usually razor-thin, so funds routinely pile on leverage — Agecroft Partners’ Don Steinbrugge put it at 20 times or higher — to make the strategy worthwhile. “As we saw in March 2020, when Treasury market liquidity deteriorated sharply, leveraged funds can be forced to unwind positions quickly,” Don Steinbrugge, founder and CEO of Agecroft Partners, said. “This can create a vicious cycle of margin calls, forced selling, and further market volatility.”