Record $6.6T hedge fund debt raises alarm for U.S. Treasuries

Hedge funds have accumulated a record $6.6 Trillion in leverage to finance bets on U.S. Treasuries, risking a “shockwave” of forced selling if bonds turn volatile. Regulators warn that hedge fund short positions in Treasury futures have reached historic extremes, confirming the scale of this crowded trade.

Torsten Slok, the chief economist at Apollo Global Management, recently warned that a forced unwind could transmit global fixed-income shockwaves. He noted that this forced unwind could impact everything from corporate bonds to mortgages. The IMF’s April 2026 report also noted that some hedge funds have become “systemically important,” meaning that their individual stresses could destabilize the entire broader financial system.

Meanwhile, the concentration of this debt is primarily tied to the “basis trade,” where funds arbitrage small price gaps between Treasury futures and cash. Hedged funds now control a record 8% to 10.3% of the $31 trillion U.S. Treasury market. The leverage is financed through repurchase agreements (repos) and prime brokerage deals, often with “zero haircuts” (no collateral requirement). That basically makes the positions extremely sensitive to even minor rate hikes or marginal calls.

Notably, hedge fund repo borrowing has more than tripled since 2019. Meanwhile, prime brokerage borrowing is up to $3.2 trillion, doubling since 2022. The Federal Reserve and the Bank of England (BoE) have cautioned that these “crowded trades” increase the market’s vulnerability to stress. However, they note that the risk remains largely unaddressed.

U.S. Treasuries serve as a global benchmark for funding costs

U.S. Treasuries serve as a global benchmark for funding costs, and a sharp correction could transmit shockwaves through fixed-income, equity, and international financing markets. The primary concern is a “disorderly unwinding.” Funds may be forced to exit positions simultaneously if market conditions shift due to disruptions in the repo market, political uncertainty, or volatility spikes. That could overwhelm dealers’ intermediation capacity, leading to a liquidity vacuum similar to the March 2020 turmoil.

While these trades typically provide liquidity during stable periods, historical episodes such as the 2019 repo crisis demonstrate how rapidly they can amplify financial instability. Apollo and the BoE have flagged the record hedge fund bets on U.S. Treasuries as a risk that could exacerbate global market shocks.

The $6.6 trillion represents gross notional exposure, not just cash invested. Hedge funds are acting as shadow banks, stepping in to buy Treasuries that traditional banks can no longer hold due to regulations. However, funds must borrow 40x to 60x their capital in the “Repo Market” (overnight loans) to make the trade worth it because the spread is minuscule (often fractions of a cent). Meanwhile, Repo banks (lenders) may demand additional collateral (a margin call) if the bond market becomes volatile (e.g., due to inflation data surprises or geopolitical fears).

Analyst raises concern over hedge funds’ rapid exit from the Treasuries market

Analyst Molly Brooks from TD Securities recently noted that hedge funds may exit rapidly if volatility spikes or arbitrage opportunities in the U.S. Treasury market diminish. The interest rate strategist at TD Securities has questioned who would step in to absorb the supply if hedge funds rapidly exit the U.S. Treasuries market, especially as nearly $10 trillion in Treasuries are due to mature and roll over next year. 

Former U.S. Treasury Secretary Henry Paulson has also echoed these concerns, recently urging policymakers to establish contingency plans for extreme scenarios where demand for U.S. Treasuries collapses. However, despite these warnings, some market strategists like Brooks view the record positioning as a rational response to high yields rather than an imminent crisis. Brooks suggests that regulatory shifts limiting bank capacity to absorb Treasuries have made hedge funds central to maintaining market liquidity.

William Merz, the head of capital markets research at U.S. Bank Asset Management Group, also argues that the record hedge fund bets on U.S. Treasuries reflect a shift in market mechanics rather than a fundamental collapse in demand. He further notes that the share of Treasuries held by individual investors and mutual funds is also rising steadily. However, he asserts that discussions about a “sell-off” of these U.S. assets are not yet reflected in actual holdings data.

Merz further emphasizes that this shift has not fundamentally altered the medium- to long-term pricing logic of Treasuries. There is also no sign of an overall collapse in demand. However, the yield on the 10-year U.S. Treasury note dropped 6.5 bps to 4.24%–partly due to investor hopes for a potential ceasefire in the Middle East.

Don’t just read crypto news. Understand it. Subscribe to our newsletter. It's free.