Hedge funds make record bets on US Treasuries, Apollo warns: a reversal could trigger a "shockwave" in the global bond market

Hedge funds' share in the U.S. Treasury market has risen to a historical peak, leveraging more than $6 trillion in capital, raising concerns about potential risks in the market.

On April 17 local time, Torsten Slok, Chief Economist at Apollo Global Management, revealed in a research report that hedge funds' holdings in the $31 trillion U.S. Treasury market recently surged to 8%, marking a new record high.

Slok warned that these positions rely heavily on borrowed capital, backed by over $6 trillion in repo agreements and prime brokerage financing. If market volatility spikes and these high-leverage positions are forced to unwind simultaneously, “shockwaves could be transmitted to global fixed-income markets.”

The U.S. Treasury market forms the foundation for pricing in the global financial system. Any sharp fluctuations can rapidly spread to equities, corporate bonds, mortgage loans, and various financing markets.

The Leverage Logic of "Basis Trading"

Hedge funds participate in the U.S. Treasury market on a large scale, with one core strategy being the so-called “basis trade”—arbitraging tiny price differences between Treasury spot and futures markets and amplifying returns through high leverage.

This strategy offers very thin profit margins, making substantial returns dependent on heavy borrowing. Because of this, if volatility increases or financing conditions tighten, traders may be forced to quickly reduce holdings, potentially triggering a stampede.

Notably, Federal Reserve economists have previously pointed out in research reports that official data may underestimate hedge funds’ actual participation in the U.S. Treasury market, implying the real risk exposure could be larger than publicly known figures.

A Crisis May Not Be Imminent, but Structural Risks Exist

Not everyone believes risks are about to erupt.

Molly Brooks, Rates Strategist at TD Securities, commented that the increase in hedge fund holdings mostly reflects the market environment of the past two years—higher yields and volatility have made Treasuries more attractive to rapid-trading investors, rather than signaling an impending crisis.

However, Brooks also pointed out a deeper issue: If hedge funds decide there’s not enough arbitrage opportunity in Treasuries and retreat, who will step in?

She noted that if volatility decreases or the Federal Reserve cuts rates more than expected, lowering yield appeal, hedge funds may voluntarily slim down their positions, necessitating other buyers to absorb Treasury supply at that point.

Market Structure Has Quietly Changed

William Merz, Head of Capital Markets Research at U.S. Bank Asset Management Group, examined this phenomenon through a broader historical lens.

He observed that after the 2008 global financial crisis, tighter regulations reduced the ability of major banks and dealers to absorb Treasury supply with their own assets, gradually shifting this function to hedge funds and other non-bank institutions.

The result: the market may be more prone to episodic volatility. Merz emphasized, however, that this structural change hasn’t fundamentally altered the long-term pricing of Treasuries, nor does it show signs of a collapse in overall demand.

He also mentioned that shares held by individual investors and mutual funds in Treasuries continue to rise. Despite recurring discussions about “selling U.S. assets,” this trend has not yet materially appeared in actual holdings data.

These concerns are not isolated. Just one day before Slok’s report was published, former Treasury Secretary Henry Paulson publicly urged policymakers to prepare contingency plans for the extreme scenario where demand for Treasuries collapses.

As of Friday’s close, the yield on the 10-year U.S. Treasury fell by 6.5 basis points to 4.24%, as investors anticipated easing tensions with Iran.