Hedge funds held an estimated $2 trillion in U.S. Treasury securities at the end of 2025, representing about 7% of marketable debt outstanding, according to the Office of Financial Research. However, research from the Dallas Federal Reserve suggests these holdings could decline as funds shift toward different investment strategies.
Much of hedge funds' current Treasury buying stems from basis trades—strategies designed to profit from small price differences between bonds and Treasury futures. These trades typically involve buying bonds, selling futures contracts, and financing the position through repo arrangements. While profitable in normal market conditions, the strategy requires substantial leverage and capital commitment.
A More Capital-Efficient Alternative
The Dallas Federal Reserve identified a competing strategy that pairs Treasury purchases with interest-rate swaps, where funds pay fixed rates and receive floating rates. This swap-spread trade has produced comparable risk-adjusted returns to traditional basis trades while requiring fewer bonds to support equivalent risk levels.
The difference is significant in practice. If a fund allocates the same amount of risk capital to the swap-spread strategy instead of the basis trade, it needs substantially fewer Treasury securities. Historical estimates show that as of September 2025, basis positions totaled approximately $832 billion while swap-spread positions reached $305 billion—together representing about 47% of large hedge funds' $2.4 trillion in total long Treasury exposure.
Market Implications
If hedge funds gradually reduce Treasury holdings by adopting these alternative strategies, other investor categories would need to purchase the securities instead. These include pension funds, overseas buyers, banks, and households. Bond prices would likely adjust downward, pushing yields higher, to attract these less-leveraged investors.
Stablecoin issuers such as Tether and Circle purchase government securities to back dollar-backed tokens, but their demand concentrates on short-term Treasury bills and cannot automatically replace longer-maturity demand.
Risk Considerations
Both trading strategies depend on access to leverage, dealer financing, and functioning repo markets. Market stress can force funds to liquidate positions simultaneously. During the April 2025 tariff episode, estimated swap-spread exposure contracted 20% before recovering in subsequent months, illustrating the vulnerability of leveraged Treasury strategies to market disruptions.
The distinction between normal market conditions and stressed periods matters for understanding potential spillovers to other assets. Funds facing immediate cash demands will sell whatever liquid assets available, and tightening dealer financing can affect other leveraged investors, but such asset sales do not establish direct causal relationships between Treasury market moves and other asset classes.
