U.S. Treasury market is relying more on hedge funds

Hedge funds are becoming a force to be reckoned with in the roughly $30 trillion U.S. Treasury market, stepping in at a time when some traditional long-term investors have been looking at other options. 

The shift is helping the government find buyers as its pile of debt grows, but it may also be making the world’s largest bond market more vulnerable, experts told CNBC.

Hedge funds’ cash Treasury holdings reached $2 trillion at the end of 2025, nearly three times their level five years earlier, the U.S. Treasurys Office of Financial Research said last month. Marketable Treasury debt — which is traded in the secondary market — was $28.9 trillion, putting hedge funds’ share at a record 7%.

More recent Federal Reserve data shows hedge funds remained net buyers of Treasurys in the first half of 2026. Domestic hedge funds bought a net $60.6 billion in the second quarter, up from $26.4 billion in the first, bringing first-half purchases to about $87 billion.

The interest from hedge funds comes at a particularly sensitive time for the Treasury market, with the 10-year yield surging to its highest level since 2007 on Monday and the 30-year soaring to the highest since 2004.

“Hedge funds apply relatively aggressive leverages as compared to other types of investors and therefore may magnify systematic risk,” said Ricky Siao, a hedge fund specialist from Union Bancaire Privée.

“When forced deleveraging happens due to extreme situations or crisis scenarios, it may result in broader liquidity and financial stability event.”

Pension funds have traditionally been buyers of long-dated government bonds because the extended investment horizons allow them to match assets against liabilities stretching decades into the future.

But structural changes, including the migration from defined-benefit plans that promise a predetermined payout to defined-contribution plans whose value depends on investment returns, are reducing pension funds’ interest in long-term government bonds, according to the OECD.

The shift also comes as some pension funds are increasing allocations to higher-yielding, less-liquid assets such as private credit. Institutional investors poured close to $300 billion into private credit vehicles in 2025, according to Mercer.

Regulators have also flagged risks that come with hedge funds’ increasing participation. The Federal Reserve said in its May financial stability report that hedge-fund leverage remained near record highs and was concentrated among large funds, with leveraged strategies supporting significant positions in Treasurys and other markets. “High leverage can lead to spillovers if the fund suddenly loses access to funding,” the Fed said.

The Bank for International Settlements went further, warning earlier this year that the rise of hedge funds as core intermediaries in government bond markets had created “new financial stability vulnerabilities.” Their reliance on leverage and short-term repo financing could leave core markets more…