Hedge funds have become the largest foreign holders of U.S. Treasuries! Since the U.S.-Iran conflict, central banks overseas have cumulatively sold $82 billion worth of U.S. Treasuries, reducing their holdings to the lowest level since 2012. Meanwhile, hedge funds now hold up to $2.4 trillion in U.S. Treasuries, tripling from three years ago, with economists believing the data underestimates by $1.4 trillion.
Hedge funds have quietly become the largest foreign holders of U.S. Treasury bonds, with their holdings even surpassing those of China, Japan, and the United Kingdom. This situation has become increasingly critical amid the backdrop of the Iran war and the withdrawal of traditional overseas buyers, yet it also harbors vulnerabilities due to its heavy reliance on purely financial logic.
Since the outbreak of the Iran war, the yield on 10-year U.S. Treasury bonds has surged nearly 50 basis points at one point, multiple Treasury auctions have shown weakness, and market concerns over non-U.S. government sell-offs of Treasuries have continued to escalate.
According to Federal Reserve custodial data, foreign central banks have sold a cumulative $82 billion worth of U.S. Treasuries since the outbreak of the war, reducing their holdings to $2.7 trillion, the lowest level since 2012.
However, the truly noteworthy buyers are not central banks but hedge funds registered in the Cayman Islands. By the end of 2025, hedge funds held $2.4 trillion in long positions on U.S. Treasuries, nearly triple the amount from three years ago. Economists at the Federal Reserve believe there remains an underestimation of $1.4 trillion.
However, hedge fund positions are based purely on arbitrage logic, and any unfavorable changes in interest rate trends or market conditions could trigger simultaneous liquidation by large amounts of capital, posing risks to financial stability.
Central banks sold $82 billion, but the impact was limited.
Following the outbreak of the Iran war, the sale of U.S. Treasuries by foreign central banks drew significant market attention.
According to Federal Reserve custodial data, non-U.S. central banks have cumulatively sold $82 billion worth of U.S. Treasuries, reducing their holdings to $2.7 trillion, a new low since 2012.
However, this scale of sell-off remains relatively limited within the broader context. The $82 billion figure is negligible compared to the overall stock of U.S. Treasuries, and discrepancies exist between this data and the more authoritative TIC cross-border capital flow figures.
More importantly, central bank sales of U.S. Treasuries are likely driven by defensive considerations to stockpile foreign exchange reserves during turbulent times rather than motivated by anti-American sentiment—Poland's recent gold sales follow a similar logic.
Hedge funds have quietly become the largest foreign holders of U.S. government bonds.
Research from the Federal Reserve Bank of New York shows that leveraged hedge funds significantly increased their holdings of U.S. Treasuries starting in 2018. According to data from the U.S. Office of Financial Research, by the end of 2025, hedge funds held long positions in U.S. Treasuries worth $2.4 trillion and short positions worth $1.6 trillion, nearly tripling compared to three years earlier.
This expansion was primarily driven by two types of trading: 'basis trades' that exploit arbitrage opportunities between futures and spot prices, and 'swap' transactions, which have recently grown dramatically in scale.
More strikingly, economists at the Federal Reserve believe there is an underestimation of up to $1.4 trillion in official TIC data regarding hedge funds’ cross-border holdings. After adjustment, 'the Cayman Islands has effectively become the largest offshore holder of U.S. Treasuries, surpassing the holdings of China, Japan, and the United Kingdom.'
Federal Reserve economists further pointed out that between 2022 and 2024, hedge funds 'absorbed 37% of the net issuance of medium- to long-term U.S. Treasuries, nearly equivalent to the combined total of all other foreign investors.'
Dual Role of Hedge Funds: Stabilizer or Risk Source?
Industry insiders such as Ken Griffin, founder of Citadel, argue that the participation of hedge funds provides beneficial liquidity support to the market. Their buying activity helped buffer bond market pressures during the Federal Reserve's tapering of quantitative easing.
However, hedge fund positions are based purely on arbitrage logic, and any unfavorable changes in interest rate trends or market conditions could trigger simultaneous liquidation by large amounts of capital, posing risks to financial stability.
It is reported that some crowded hedge fund positions were 'washed out' at the onset of the Iran conflict, but the situation has not yet deteriorated further. Long-term asset holders like insurance companies have also shown no significant signs of exiting, keeping the market relatively stable.
Regardless of how the market currently responds, U.S. Treasury Secretary Scott Bessent cannot ignore the pressure of refinancing. Next year, debt equivalent to 33% of the total U.S. Treasuries will mature, requiring the issuance of approximately $10 trillion in new bonds.
Editor/Jayden