Hedge funds reach record 7% share of U.S. Treasury market

Hedge funds have reached a record 7% share of the $28.9 trillion tradable U.S. Treasury market, with cash holdings hitting $2 trillion by the end of 2025. This represents a nearly threefold increase compared to five years ago.

In the first half of 2026, U.S. hedge funds remained net buyers, purchasing $26.4 billion in the first quarter and $60.6 billion in the second quarter. A primary driver of this activity is the basis trade, which involves buying cash Treasurys while selling related futures to capture price differentials. This strategy often utilizes significant leverage, sometimes exceeding 20 times.

Financial experts and the Federal Reserve have noted that while hedge fund activity can provide liquidity, the high levels of leverage and reliance on short-term funding pose systemic risks. Rapid unwinding of positions during periods of volatility could lead to margin calls, forced sales, and liquidity shortages.

Concurrently, demand for long-term Treasurys from pension funds has weakened as retirement systems undergo structural shifts and institutions increasingly allocate capital toward private credit.