Hedge funds have increased their share of the U.S. Treasury market to a record 7%, amid concerns that their use of leverage could heighten market volatility as Treasury yields surge.
According to the Financial Stability Oversight Council under the U.S. Treasury, hedge funds held $2 trillion in U.S. Treasuries at the end of last year, nearly three times the amount from five years ago. They have continued to be net buyers this year, with the Federal Reserve reporting net purchases of approximately $87 billion in the first half of 2026.
As reported by CNBC, the U.S. Treasury market is valued at about $28.9 trillion, making the hedge fund share of 7% unprecedented.
Market observers are closely monitoring the growing influence of hedge funds, especially as long-term Treasury yields have recently surged. On September 29, the yield on the 30-year Treasury bond exceeded 5.6%, the highest level since June 2002. The benchmark 10-year Treasury yield also reached 5.255%, marking its highest point since 2007.
Ricky Xiao, head of hedge funds at global asset management firm UBP, told CNBC, "Hedge funds tend to use relatively aggressive leverage compared to other investors, which can increase overall market risk." He explained that if extreme situations arise and funds are forced to reduce leverage, it could lead to forced asset sales, further destabilizing market liquidity and financial stability.
U.S. financial authorities have also raised alarms about the expanding influence of hedge funds. The Federal Reserve noted in its May financial stability report that hedge fund leverage is nearing record levels, concentrated among large hedge funds. It specifically pointed out that significant leverage is being used to invest in Treasuries. The Fed warned that if hedge funds suddenly face funding difficulties, their high leverage could spread risks to other financial markets.
The Bank for International Settlements (BIS) expressed concerns earlier this year that hedge funds are becoming key intermediaries in the Treasury market, introducing new financial stability risks.
Traditionally, long-term Treasuries have been primarily held by pension funds, which are long-term investors. However, a shift from defined benefit (DB) plans, which guarantee fixed pensions, to defined contribution (DC) plans, where pension amounts vary based on investment performance, has reduced demand for long-term Treasuries among pension funds.
As pension fund demand weakens, hedge funds are gaining prominence. They focus on generating higher short-term returns than the market average through leverage, which can increase market volatility.
However, experts note that hedge fund participation in the Treasury market is not entirely detrimental. They argue that because hedge funds actively buy and sell based on market conditions rather than holding Treasuries to maturity, they can actually provide liquidity to the market.
Don Steinbrugge, CEO of hedge fund consulting firm Agecroft Partners, stated, "The increased influence of hedge funds in the Treasury market is necessary for market liquidity, but it can also pose risks to the entire financial system."
* This article has been translated by AI.
Copyright ⓒ Aju Press All rights reserved.