As of the end of 2025, hedge funds own a record 7% of outstanding U.S. Treasury bonds. The market size is approximately $30 trillion. According to data from the Office of Financial Research (OFR), hedge funds' cash treasury assets have reached $2 trillion, nearly three times the level five years ago. For a long time, pension funds have provided stable demand for long-term government bonds. However, according to the Organization for Economic Cooperation and Development (OECD), this appetite is starting to wane amid changes in pension payouts. In this context, hedge funds have begun to actively participate in the market: in the first half of 2026, they acquired a net $87 billion in treasury bonds.
A popular strategy – cash and futures arbitrage. Funds buy treasury bonds and sell corresponding futures, hoping to profit from slight price discrepancies. To execute this strategy, funds actively use leverage through reverse repo agreements and short-term loans secured by treasury bonds. However, such a high degree of leverage carries risks for the market. Don Steinbrugge, founder and CEO of Agecroft Partners, notes that arbitrage positions are often leveraged 20 times or more. He emphasizes: “As we saw in March 2020, when the liquidity of the treasury bond market sharply deteriorated, leveraged funds may be forced to quickly sell off their positions.” When volatility increases, creditors make margin calls, which can force funds to sell treasury bonds, lowering their prices and prompting other funds to exit.
A Federal Reserve report in May indicated that hedge fund leverage remains at record high levels, concentrated among large funds. According to the Bank for International Settlements (BIS), which serves central banks, a warning about high risks was also issued earlier this year. At the same time, according to Morgan Stanley estimates, arbitrage positions have shrunk by a fifth this year, amounting to $1.2 trillion. Nevertheless, Ken Heinz, president of Hedge Fund Research, believes that active trading provides liquidity both during growth and during sell-offs, potentially calming rate fluctuations. However, the same funds that stabilize markets in calm times can become forced sellers in sharp downturns. If yields continue to rise, margin calls may test the ability of leveraged funds to hold their positions.
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