Hedge funds reached a record 7% share of tradable US Treasurys by the end of 2025, with total cash holdings reaching $2 trillion. This figure represents a threefold increase compared to the level recorded five years prior. Data from the Federal Reserve indicates that domestic hedge funds acquired a net $87 billion in Treasurys during the first half of 2026.
A primary strategy driving this activity is the cash-futures basis trade, which involves purchasing Treasurys while selling matching futures. To capitalize on small price gaps, funds utilize significant leverage through repurchase agreements. Don Steinbrugge of Agecroft Partners notes that these trades often carry leverage ratios of 20 times or more, creating risks during periods of market volatility.
Regulators, including the Bank for International Settlements and the Federal Reserve, have expressed concerns regarding high leverage levels among large funds. If volatility spikes, margin calls could force rapid liquidation of positions, potentially impacting market stability. Morgan Stanley estimates that leveraged basis-trade positions have decreased by approximately 20% this year to $1.2 trillion.
Despite these risks, proponents like Ken Heinz of Hedge Fund Research argue that active trading provides essential liquidity during both market rallies and sell-offs. As yields on 10-year and 30-year Treasurys have reached their highest levels since 2007 and 2002 respectively, the ability of leveraged funds to maintain their positions remains a key focus for market observers.
