Hedge funds have significantly increased their presence in the U.S. Treasury market, now holding a record $2 trillion in cash Treasury securities at the end of 2025, nearly three times their holdings five years prior, according to the U.S. Treasury's Office of Financial Research [1]. This accounts for 7% of the $28.9 trillion in marketable Treasury debt, marking the highest share ever recorded for hedge funds [1]. Federal Reserve data indicates that hedge funds continued to be net buyers in the first half of 2026, purchasing a net $60.6 billion in the second quarter, up from $26.4 billion in the first, totaling about $87 billion for the first half of the year [1].
This shift in market participation comes as traditional long-term investors, such as pension funds, reduce their allocations to long-dated government bonds. The OECD attributes this trend to structural changes, including the move from defined-benefit to defined-contribution pension plans, and a growing preference for higher-yielding, less-liquid assets like private credit, which attracted nearly $300 billion from institutional investors in 2025 [1].
The increased role of hedge funds is occurring during a period of heightened volatility, with the 10-year Treasury yield reaching its highest level since 2007 and the 30-year yield hitting levels not seen since 2004 [1]. Experts and regulators have expressed concerns about the risks associated with hedge funds' aggressive use of leverage. Ricky Siao, a hedge fund specialist at Union Bancaire Privée, warned that forced deleveraging in crisis scenarios could trigger broader liquidity and financial stability events [1]. The Federal Reserve's May financial stability report highlighted that hedge-fund leverage remains near record highs and is concentrated among large funds, posing potential spillover risks if access to funding is suddenly lost [1]. The Bank for International Settlements also cautioned that the rise of hedge funds as core intermediaries in government bond markets has increased systemic vulnerabilities [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 systemic risk due to high leverage and potential liquidity shocks. Regulators and market experts are closely monitoring these developments, warning that the market's stability could be tested if hedge funds are forced to rapidly unwind positions.