Hedge funds “take over” the $30 trillion US bond market: record holdings bring liquidity, but also the risk of deleveraging?

The Zhitong Finance App learned that in the US Treasury bond market of about 30 trillion US dollars, hedge funds are growing into a force that cannot be ignored. At a time when many traditional long-term investors are switching to other assets, hedge funds are entering the market to take over.

In an interview, experts said that while this transformation helped the US government find buyers as the size of government debt continued to expand, it could also make the world's largest bond market more vulnerable.

According to data released by the US Treasury's Office of Financial Research last month, by the end of 2025, the size of spot treasury bonds held by hedge funds had reached 2 trillion US dollars, nearly tripling from five years ago. The total amount of treasury bonds in circulation that can be traded in the secondary market is US$28.9 trillion, and the share of hedge fund holdings reached a record high of 7%.

According to the latest data from the Federal Reserve, hedge funds continued to make net purchases of US Treasury bonds in the first half of 2026. Domestic hedge funds made net purchases of US$60.6 billion in the second quarter, up from US$26.4 billion in the first quarter, with total purchases of about US$87 billion in the first half of the year.

The massive deployment of treasury bonds by hedge funds coincided with the treasury bond market at a highly sensitive stage: on Monday, 10-year US bond yields soared to the highest level since 2007; on Tuesday, 30-year US bond yields hit a new high in 2002.

Ricky Siao, a hedge fund expert at UBP Bank, said: “Compared to other types of investors, the leverage used by hedge funds is relatively aggressive, so it may amplify systemic risk.”

“Once an extreme situation or crisis triggers passive deleveraging, it may trigger a widespread liquidity crisis and impact financial stability.”

A new class of buyer power

Traditionally, pensions are the main buyers of long-term treasury bonds. The long investment cycle makes it easy for them to use assets to match their liabilities for decades to come.

However, according to the Organization for Economic Cooperation and Development (OECD), structural changes are weakening the willingness of pensions to allocate long-term US bonds: defined income plans that originally promised fixed payments are gradually being transformed to defined contribution plans, and the latter's returns depend on return on investment.

At the same time, some pensions are adding more profitable and less liquid assets such as private credit. According to Mercer Consulting data, institutional investors will inject nearly 300 billion US dollars into private credit products in 2025.

Regulators have also warned of the risks behind rising hedge fund positions. The Federal Reserve pointed out in its May Financial Stability Report that the leverage level of hedge funds is still close to historic highs, and is highly concentrated on leading funds; leveraged trading strategies have established huge positions in treasury bonds and other markets. The Federal Reserve said, “Once fund financing channels are suddenly interrupted, high leverage can trigger risk spillover.”

The Bank for International Settlements's warning was more acute. It proposed earlier this year that the rise of hedge funds to become core intermediaries in the treasury bond market has spawned “new financial stability risks.” Hedge funds are highly dependent on leverage and short-term repurchase financing. Once the market changes, the core bond market is prone to sudden deleveraging and market failure.

When hedge funds buy treasury bonds, they are not simply optimistic about coupon returns.

Noah Hamman, founder of AdvisorShares, said, “The two logics are very different. Most pension and insurance institutions focus on the long term, and the core is debt matching; hedge funds pursue performance and usually have a shorter cycle. The goal is to break through high water levels and outperform performance benchmarks.”

stress test

A large number of hedge fund transactions are a relative value strategy aimed at capturing small price differences between highly related securities. The most representative of these is treasury bond spot-futures basis trading: the fund buys spot US bonds and sells corresponding treasury bond futures at the same time to earn income from the price difference between the two markets.

Since the price difference between spot and futures is usually minimal, funds often use high leverage to amplify returns. With repurchase financing, they can use treasury bonds as collateral to build positions that far exceed their own principal amount by several times.

As the sell-off of treasury bonds intensifies, there are already signs that hedge funds are becoming more cautious in their trading choices. Morgan Stanley estimates that the size of leveraged treasury bond margin trading positions fell by about 20% to 1.2 trillion US dollars this year.

However, this round of contraction does not mean that hedge funds are selling off US bonds in a big way. Federal Reserve data shows that as of the second quarter, they were still net buyers of treasury bonds.

However, this contraction is sufficient to show that leveraged positions will change rapidly according to the market environment, and also highlights the risk of disorderly liquidation during the market pressure phase.

Don Steinbrugge, founder and CEO of AgecroftPartners, said: “The greatest risk comes from margin trading. While hedge funds buy treasury bonds that can be used for futures delivery, they are shorting corresponding treasury bond futures. This type of trading is extremely profitable, and the leverage is often 20 times or more.”

“We saw a similar scenario in March 2020: liquidity in the treasury bond market deteriorated dramatically, and leveraged funds were forced to quickly close their positions. This will trigger a vicious cycle of margin recovery, passive sell-off, and further market volatility.”

When volatility rises sharply, leveraged hedge funds either add margin or close positions. The sell-off will depress bond prices, amplify losses, and force more funds to leave the market.

In addition to risk warnings, experts also mentioned the positive role played by hedge funds in the treasury bond market.

Ken Heinz, president of Hedge Fund Research, said that hedge funds prefer continuous trading rather than holding bonds until maturity like traditional institutions. Whether the market rises or falls, this type of transaction can provide two-way liquidity, which ultimately helps stabilize interest rate trends and reduce fluctuations.

So the problem is not that hedge funds themselves will hurt the treasury bond market. Under normal circumstances, their transactions can improve liquidity and correct pricing deviations.

Steinbrugge said, “When formulating policies, it is necessary not only to see the market liquidity dividends brought by hedge funds, but also to be wary of the potential risk of disorderly liquidation of positions. Hedge funds continue to increase their voice in the treasury bond market, which is not only a necessary force for maintaining liquidity, but also a source of systemic risk.”