Hedge funds hold record Treasury share, raising liquidity concerns

Hedge funds’ Treasury market risks are drawing attention as their cash holdings reach a record share of U.S. government debt. For everyday investors, the issue is less about who owns Treasurys on a normal day than whether heavily borrowed trades could lead to fast selling and thinner trading when markets come under pressure.

Hedge funds held $2 trillion of cash Treasurys at the end of 2025, nearly three times the level five years earlier, CNBC reported, citing the Treasury Department’s Office of Financial Research. That represented 7% of the $28.9 trillion market for marketable Treasurys, securities that can be traded after issuance. Federal Reserve data cited by CNBC also showed domestic hedge funds bought a net $87 billion of Treasurys in the first half of 2026.

Those figures measure cash bond holdings. They should not be confused with the Federal Reserve’s broader estimate of large funds’ positions, which includes both long and short exposures. In a June research note, the Fed estimated that large hedge funds had $4 trillion in gross Treasury exposure as of September 2025, made up of $2.4 trillion of long exposure and $1.6 trillion of short exposure. The Fed estimated those funds held about 8.5% of privately held Treasurys by market value.

Why could hedge funds’ Treasury trades create risks?

A major focus is the cash-futures basis trade. A fund buys a cash Treasury bond while selling a related Treasury futures contract, seeking to capture a usually small difference in their prices. The Federal Reserve says this trade pairs a long Treasury position financed through the repo market with a short futures position.

Repo, short for repurchase agreement, is short-term borrowing secured by collateral such as Treasurys. It allows funds to take positions far larger than the cash they commit. The Fed estimated hedge funds had $3 trillion in repo cash borrowing as of September 2025. It also estimated the cash-futures basis trade at about $830 billion, or 35% of large hedge funds’ long Treasury exposure.

That borrowing can make a small pricing gap worthwhile, but it also creates a potential pressure point. If volatility rises or lenders pull back, funds may need to provide more cash, reduce positions or both. CNBC, citing market participants and regulators, reported that rapid closures can add selling pressure, generate further losses and margin demands, and reduce market liquidity. Margin is collateral that traders must post to cover potential losses.

The Federal Reserve said highly leveraged arbitrage strategies dominated hedge funds’ Treasury positioning, while acknowledging that available data make it difficult to assign every position to a specific strategy. The activity is also concentrated: the 50 largest funds accounted for about 90% of gross hedge-fund Treasury exposure in September 2025, according to the Fed.

The risk is a stress scenario, not a finding that such an unwind is underway. The Bank for International Settlements has warned that leverage and short-term repo financing can make core government-bond markets more vulnerable to sudden deleveraging. March 2020, when Treasury-market liquidity deteriorated sharply, remains a historical example of how quickly conditions can change, CNBC reported.

Hedge funds can also support trading. Ken Heinz, president of Hedge Fund Research, told CNBC their willingness to trade during both rallies and sell-offs can provide two-sided liquidity. The policy concern is whether that normal-times benefit holds when funding and volatility are under strain.

This story draws on original reporting from CNBC.