The big players supporting the Treasury market?...Hedge funds, the real reason behind the $2 trillion surge

▲ U.S. stock market, bull market, bear market, bonds/AI-generated image

The U.S. Treasury market is increasingly relying on leveraged hedge funds, reaching an all-time high, amid the departure of traditional long-term investors.

According to CNBC, a U.S. economic news outlet, on September 30 (local time), the amount of U.S. Treasuries held by U.S. hedge funds reached $2 trillion as of the end of 2025, accounting for 7% of the total $28.9 trillion outstanding Treasury market. This 7% share by hedge funds is an all-time high, representing an almost threefold surge in their holdings over the past five years.

Hedge funds maintained a strong net buying trend in U.S. Treasuries in the first half of 2026. Following $26.4 billion in the first quarter, they purchased another $60.6 billion in the second quarter, leading to net purchases of approximately $87 billion in Treasuries in the first half alone. Short-term leveraged hedge funds are effectively filling the void left by slowing demand from traditional long-term holders such as the Federal Reserve's (Fed) quantitative tightening and foreign central banks.

The market has mixed assessments regarding hedge funds' rapid market dominance, citing both liquidity provision and financial stability risks. Hedge funds perform positive functions by supplying market liquidity and resolving price inefficiencies through aggressive arbitrage strategies, such as basis trading, which exploits price differences between spot and futures.

However, due to their structural reliance on high borrowed leverage, warnings have grown louder that a market shock could trigger large-scale forced liquidations. Financial authorities have expressed concerns that rapid deleveraging by hedge funds during periods of sharp interest rate fluctuations could instantly evaporate liquidity in the secondary market, exacerbating instability across the entire financial system.

[Article Key Summary]

-Hedge funds' holdings of U.S. Treasuries surpassed $2 trillion, reaching an all-time high of 7% market share in the secondary market.

-They emerged as key buyers, filling the void left by traditional institutions, with net purchases of approximately $87 billion in the first half of 2026 alone.

-Behind the positive aspect of liquidity provision, systemic risks arising from basis trading leverage liquidations have been raised.

*Disclaimer: This article is for investment reference only, and we are not responsible for investment losses based on it. The content should be interpreted for informational purposes only.*