Hedge funds are becoming a bigger force in the roughly $30 trillion US Treasury market, raising a new question for investors: what happens if these funds suddenly rush for the exit?
Hedge funds held about $2 trillion in cash Treasurys at the end of 2025, nearly three times their level five years earlier, according to the Office of Financial Research, cited by CNBC. That amounted to about 7% of the $28.9 trillion in marketable Treasury debt—a record share.
Their buying has continued in 2026 too. Domestic hedge funds bought a net $60.6 billion of Treasurys in the second quarter, after $26.4 billion in the first quarter, taking their first-half purchases to about $87 billion.
The growing presence comes as the Treasury market faces pressure from rising yields. The 10-year yield surged to its highest level since 2007 on Monday, and the 30-year soared to the highest since 2002 on Tuesday.
Borrowed bets could amplify Treasury sell-off
The concern is less about hedge funds owning Treasurys and more about how they finance those positions.
“Hedge funds have placed huge borrowed bets on US government bonds, mostly through the ‘basis trade,’ earning money from tiny price gaps between bonds and futures,” said Prathamesh Kadiwal, research analyst at Bonanza Portfolio Ltd.
He said hedge funds now hold a record share of the market, but a sudden rush to sell could send Treasury prices sharply lower and yields higher. “Hedge funds have already unwound over $200 billion in positions as profits vanish,” Kadiwal said, adding that a similar dynamic played out in March 2020 and forced the Federal Reserve to intervene.
Risk beyond hedge fund sell-off
The risk can increase when leveraged funds face margin calls. A fall in Treasury prices can force funds to sell assets to meet those calls, potentially pushing prices down further.
“If Treasury yields were to rise rapidly and the basis between cash Treasuries and futures moved against leveraged positions, margin calls and tighter financing conditions could force funds to deleverage simultaneously,” said Rohit Suri, CEO – UHNI Business at Ionic Wealth.
That could create a feedback loop, he said, where forced selling pushes Treasury prices lower and yields higher, while deteriorating liquidity makes it harder for dealers to absorb the selling.
“The bigger concern, therefore, is not a hedge-fund sell-off in isolation, but the possibility of a crowded, leveraged unwind occurring when dealer balance sheets and market liquidity are already constrained,” Suri said.
Still, hedge funds also provide liquidity and arbitrage capital to the Treasury market. Suri said the risk is better understood as the market becoming more sensitive to leverage, short-term funding and concentrated trading strategies—not simply to hedge funds owning more US government debt.
