Hedge funds held an estimated $2 trillion in cash US Treasuries at the end of 2025. Dallas Fed research finds that a rival trade could support a much smaller Treasury position for the same risk capital, which could leave the government needing other buyers.
Hedge funds held an estimated $2 trillion in cash US Treasuries at the end of 2025, or about 7% of the marketable debt outstanding, according to the Office of Financial Research. Much of that buying ties to trades that earn small differences between bond and derivatives prices.
Dallas Federal Reserve research published Oct. 16 found that alternatives to the cash-futures basis trade have become more attractive. It also found that moving a fixed amount of risk capital into those alternatives can produce a much smaller Treasury position. As a result, the government needs other investors to buy the securities hedge funds no longer finance, potentially at higher yields.
A swap-based trade needs fewer bonds for the same risk
The competing strategy starts with a Treasury purchase but pairs it with an interest-rate swap, in which the fund pays a fixed rate and receives a floating one. Its recent risk-adjusted return has become comparable to the classic basis trade.
Swap-spread trades can carry more dollar risk per $1 of notional position. A hypothetical manager willing to tolerate a $10 million loss would support $1 billion in Treasuries if the basis position would lose 1% of its bond notional, but only $500 million if the swap-spread position would lose 2%.
Fed data show the two strategies diverging in April 2025
Using the Federal Reserve's monthly series, the estimated basis position rose from $213 billion in January 2023 to $832 billion in September 2025. The swap-spread position went from $42 billion to $305 billion over the same period.
The two did not move together in April 2025, when tariff announcements disrupted bond markets. The estimated swap-spread exposure dropped from $295 billion to $237 billion, a 20% contraction, while basis exposure increased from $725 billion to $829 billion. These are month-end estimates and can miss violent intra-month moves.
Other buyers would need a price that suits them
If hedge funds gradually reduce their holdings, pension funds, overseas buyers, banks and households can buy the Treasuries instead, provided the price offers enough return. Because bond prices and yields move in opposite directions, such a market can reach a more patient buyer through cheaper bonds and higher yields rather than through disorderly liquidation.
The Fed's Oct. 27-28 meeting could alter expectations for the short-term rates that feed into repo financing.
Source: CryptoSlate
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