News Digest: Hedge Funds’ Growing Treasury Footprint Raises Stability Concerns
October 5, 2026
Hedge funds have become a major force in the roughly $30 trillion U.S. Treasury market, a shift that is helping the government find buyers for its expanding debt but may also be making the market more fragile, experts told CNBC.
Their cash Treasury holdings reached $2 trillion at the end of 2025, nearly triple the level of five years earlier, according to the Office of Financial Research. That equals a record 7% of marketable Treasury debt. Federal Reserve data shows domestic hedge funds remained net buyers in the first half of 2026, purchasing about $87 billion.
The trend arrives at a sensitive moment. The 10-year yield hit its highest level since 2007, while d the 30-year reached its highest since 2002 a day later. Meanwhile, traditional buyers are stepping back: pension funds are losing interest in long-dated government bonds as defined-benefit plans give way to defined-contribution plans, and some are shifting into private credit.
Regulators are worried. The Fed’s May financial stability report said hedge-fund leverage remained near record highs and concentrated among large funds, while the Bank for International Settlements warned of “new financial stability vulnerabilities” from funds’ reliance on leverage and short-term repo financing.
The central concern is the cash-futures basis trade, in which funds buy Treasuries and sell matching futures, often with leverage of 20 times or more to profit from tiny price gaps. Experts pointed to March 2020, when deteriorating liquidity forced rapid unwinds and created a cycle of margin calls and forced selling. Morgan Stanley estimates basis-trade positions have already fallen about 20% this year to $1.2 trillion.
Still, experts noted hedge funds also provide useful two-sided liquidity and help correct pricing discrepancies in normal conditions. Agecroft Partners’ Don Steinbrugge said regulators must weigh a possible disorderly unwind against those benefits, calling hedge funds’ role both necessary for liquidity and a potential source of systemic risk.
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