Hedge Funds Hold A Record Share Of U.S. Treasurys. Regulators Are Watching The Leverage Behind It.

Hedge funds have become a much bigger presence in the U.S. Treasury market, holding a record share of marketable government debt while regulators focus on the leverage behind some of their biggest trading strategies.

Their long cash Treasury holdings reached about $2 trillion at the end of 2025, nearly three times the amount held five years earlier, according to the Office of Financial Research. Marketable Treasury debt increased 29% over the same period to $28.9 trillion, leaving hedge funds with a record 7% share of the cash Treasury market.

The shift has continued as Treasury borrowing has expanded. Federal Reserve data released Sept. 11 showed domestic hedge funds remained net buyers during the first two quarters of 2026. Net acquisitions of Treasury securities were running at a seasonally adjusted annual rate of $26.4 billion in the first quarter and $60.6 billion in the second.

That growing presence comes with a distinction from some of the traditional investors in government bonds. Pension funds and insurers often buy longer-term bonds to match liabilities extending years or decades into the future. Hedge funds are more likely to trade around price differences and market movements rather than simply hold securities until maturity.

The OECD said in its 2026 Global Debt Report that structural changes in pension systems have reduced demand for long-dated bonds in some markets. The gradual migration from defined-benefit pensions to defined-contribution plans has reduced the need for some funds to match long-term liabilities with long-duration government securities.

The OECD also found that hedge funds have become some of the most active participants in certain major government bond markets. More than half of government debt issuers surveyed by the organization described hedge funds as marginal buyers in their markets, while several said their activity had a positive effect on liquidity.

But the different investment model brings a different set of risks.

"Hedge funds apply relatively aggressive leverages as compared to other types of investors and therefore may magnify systematic risk," Ricky Siao, a hedge fund specialist at Union Bancaire Privée, told CNBC.

The Federal Reserve has already highlighted elevated borrowing across the sector. Hedge fund leverage remained near record-high levels in the third quarter of 2025, the latest period for which comprehensive Form PF data were available when the Fed published its May Financial Stability Report. Leverage was also concentrated among larger funds.

The central bank said increased leverage in recent years has supported sizeable positions in Treasurys, interest-rate derivatives, equities and other markets. It warned that heavy leverage can create spillovers when a fund suddenly loses access to financing.

One strategy attracting particular scrutiny is the Treasury cash-futures basis trade.

In a typical basis trade, a hedge fund buys a Treasury security while taking an offsetting short position in Treasury futures, seeking to profit as a relatively small difference between the prices of the two instruments narrows. The cash Treasury position can be financed through the repo market, allowing funds to build positions substantially larger than the capital committed to the trade.

That structure can generate substantial leverage because the price differences being targeted are generally small.

The Bank for International Settlements said this year that leveraged hedge funds had become pivotal intermediaries in sovereign debt markets, with U.S. sovereign-debt exposures among hedge funds more than doubling relative to GDP since 2022 as relative-value strategies expanded.

The BIS said hedge funds typically rely on short-term repo borrowing to finance leveraged trades. That can provide liquidity during normal conditions but can also leave markets exposed when funds rapidly reduce positions as financing conditions tighten.

Treasury yields have risen sharply again in recent weeks. The U.S. Treasury Department daily yield curve showed the 10-year Treasury yield at 5.26% and the 30-year yield at 5.59% on Sept. 29, up from 4.96% and 5.29%, respectively, a week earlier.

Hedge funds do not only add risk to the market, however. Their willingness to buy and sell securities, rather than hold them to maturity, can provide trading liquidity and help close price gaps between related securities.

The OECD said hedge funds have provided "much-needed liquidity" and supported demand at government bond auctions and syndications, even as their expanding footprint has increased concerns about how markets could respond to sudden shifts in leveraged positions.