Robin Wigglesworth, Kate Duguid, Costas Mourselas and Ian Smith
“It’s unstable because there is a lot of supply [of US government debt].”
Indeed, the conundrum confronting those regulators and policymakers that might still want to neuter these strategies is that the Treasury market has come to depend upon them.
The gross US government bond holdings of all hedge funds that report to the SEC stood at nearly $3.4tn at the end of 2024, and has roughly doubled just since the beginning of 2023, according to the OFR. Much of this will be held through myriad other strategies, but judging by the size of the short Treasury futures positions, most estimates are that fixed-income relative-value hedge funds in aggregate probably hold roughly $1tn of Treasuries.
That would mean that these strategies now hold almost as much US government debt as Japan’s central bank, the single biggest overseas holder, and more than China’s official holdings. With foreign investors already nervous about the Trump administration, it means the health of the Treasury market might be hostage to the very same trades that occasionally cause it palpitations.
A senior executive at one of the world’s largest trading firms concedes that the growing presence of hedge funds and trading firms in the Treasury market would inescapably make it more volatile. This in turn could lead to investors demanding higher yields as compensation. However, given the scale of US government debt issuance, their involvement is necessary.
