Record Hedge Fund Treasury Holdings: Basis Trade Unwind Risks

At end-2025, hedge funds accounted for a record 7% of tradable US Treasurys, a market valued at around $30 trillion. Regulators caution that the leverage underlying these holdings might worsen any disruption in the Treasury market.

According to the Office of Financial Research (OFR), a unit within the Treasury Department, hedge funds' cash Treasury holdings reached $2 trillion. That amount is nearly three times what it was five years prior.

Why Hedge Funds Have Boosted Their Treasury Buying

Demand for long-dated government bonds has traditionally been anchored by pension funds. However, the Organisation for Economic Co-operation and Development (OECD) notes that this demand is declining as pension plans move away from fixed payout structures.

According to CNBC, hedge funds have filled that gap. Federal Reserve figures indicate that domestic hedge funds purchased a net $87 billion of Treasurys during the first six months of 2026.

A prominent approach is the cash-futures basis trade. In this strategy, funds purchase Treasurys and sell corresponding futures, aiming to profit from a small price discrepancy.

Given the narrow profit margin, funds rely heavily on borrowing via repurchase agreements (repos), which are short-term loans secured by Treasurys.

Potential Risks From Hedge Funds Selling Treasurys

Don Steinbrugge, founder and CEO of Agecroft Partners, states that basis trades frequently carry leverage of 20 times or higher.

“As we saw in March 2020, when Treasury market liquidity deteriorated sharply, leveraged funds can be forced to unwind positions quickly.”

— Don Steinbrugge, Agecroft Partners, in an interview with CNBC.

A spike in volatility can trigger margin calls from lenders, requiring additional cash. In response, funds might sell Treasurys, driving prices lower and prompting further selling by other funds.

The Federal Reserve's May 2026 report indicated that hedge fund leverage stayed close to record levels, with concentration at large funds. Similarly, the Bank for International Settlements (BIS), an organization for central banks, gave a comparable caution earlier in 2026.

On Monday, the 10-year Treasury yield, which is above 5%, climbed to its highest point since 2007. The 30-year yield reached its highest since 2002 on Tuesday.

Nevertheless, Morgan Stanley estimates that leveraged basis-trade positions have decreased by roughly 20% so far this year, standing at $1.2 trillion.

Argument for Hedge Fund Role in Treasury Market

Ken Heinz, president of Hedge Fund Research, argues that active trading provides liquidity during both upward and downward market moves. This, he added, could eventually stabilize interest rate fluctuations.

The same hedge funds that help smooth trading in stable conditions may turn into forced sellers during a market rout. If yields continue to rise, margin calls will test whether these leveraged funds can maintain their holdings.