Hedge funds have significantly increased their presence in the U.S. Treasury market, now holding $2 trillion in cash Treasurys at the end of 2025—nearly three times their holdings five years earlier, according to the U.S. Treasury's Office of Financial Research. This represents a record 7% share of the $28.9 trillion marketable Treasury debt outstanding, marking a notable shift in the composition of buyers for U.S. government bonds [1].
Recent Federal Reserve data indicates that hedge funds continued to be net buyers in the first half of 2026, with domestic hedge funds purchasing a net $60.6 billion in the second quarter, up from $26.4 billion in the first quarter, totaling about $87 billion for the first half of the year [1]. This increased demand from hedge funds comes as the 10-year Treasury yield surged to its highest level since 2007 and the 30-year yield reached its highest since 2002, highlighting a period of heightened market sensitivity [1].
The growing role of hedge funds is partly due to traditional long-term investors, such as pension funds, reducing their allocations to long-dated government bonds. Structural changes, including a shift from defined-benefit to defined-contribution pension plans and increased allocations to higher-yielding, less-liquid assets like private credit, have contributed to this trend. In 2025, institutional investors allocated nearly $300 billion to private credit vehicles [1].
Regulators have expressed concerns about the risks associated with hedge funds' aggressive use of leverage. The Federal Reserve's May financial stability report noted that hedge-fund leverage remains near record highs and is concentrated among large funds, warning that high leverage could lead to spillovers if funds lose access to funding. The Bank for International Settlements has also warned that the rise of hedge funds as core intermediaries in government bond markets has created new financial stability risks [1]. Hedge fund specialist Ricky Siao emphasized that forced deleveraging during crises could result in broader liquidity and financial stability events [1].
CONCLUSION
Hedge funds now play a record role in the U.S. Treasury market, filling a gap left by traditional investors but raising concerns about market stability due to their high leverage. Regulators and experts warn that this shift could amplify risks, especially during periods of market stress, making the Treasury market more vulnerable to shocks.