Hedge funds expand role in US Treasury market

Hedge funds held about $2 trillion of US Treasury securities at the start of 2026, equivalent to roughly 7% of the market. U.S. and international regulators are examining whether greater use of leverage and short-term trading by these firms could increase price swings.

Data from the Treasury Department’s Office of Financial Research shows hedge fund holdings have more than doubled over the past five years. Federal Reserve data and market strategists indicate those positions remain elevated as traditional long-term investors reduce their exposure to government bonds.

Research from the Centre for Economic Policy Research shows U.S. pension funds reduced allocations to fixed income from close to 40% historically to about 10%–15% today. European pension allocations have fallen from roughly 35% at the start of the century to around 20%. These shifts have left a gap in demand for Treasuries that hedge funds have helped fill.

Hedge funds often use leverage and rapid trading strategies to exploit price differences between cash Treasuries and futures. One common tactic, the Treasury basis trade, involves borrowing to amplify returns on small pricing discrepancies between securities and related futures contracts. Growth in that strategy has slowed from earlier rates but remains a significant part of hedge fund activity.

Staff at the Federal Reserve Bank of New York have discussed Treasury market trading with investors and other participants, focusing on relative-value strategies that take offsetting positions across government securities. Foreign central banks and the International Monetary Fund are also monitoring hedge fund activity in government debt markets.

About $1.2 trillion of Treasury securities trade daily. Yields have risen in recent periods amid concerns about inflation, geopolitical tensions and the volume of government borrowing. The 10-year Treasury yield reached 5% on Sept. 14, and the 30-year yield is trading near its highest level in almost 20 years.

Multi-manager hedge funds, including large firms with many specialist trading teams, use leverage to increase position size and tend to have shorter investment horizons than buy-and-hold investors. That structure can lead to rapid position unwinds if market prices or funding conditions change suddenly. At the same time, hedge funds often act as counterparties and can provide trading liquidity when traditional investors are less active.

European and Japanese bond markets show similar patterns. The European Central Bank estimated in 2024 that hedge funds accounted for more than half of trading volumes in European government bond markets, up from about a quarter in 2018. In Japan, overseas investors, including hedge funds, account for roughly 60% of daily bond-market transactions and about 90% of bond-futures trading while holding about 10% of outstanding bonds.

U.S. authorities are engaging with market participants to better understand trading strategies and funding risks as the federal budget deficit is projected at about 6% of GDP this fiscal year, increasing the volume of Treasuries that markets must absorb.