Key Takeaways
- • Hedge funds held an estimated $2 trillion in cash US Treasuries at the end of 2025, roughly 7% of marketable debt outstanding, according to the Office of Financial Research (OFR).
- • A Dallas Federal Reserve paper published Oct. 16 found that reallocating a fixed amount of risk capital from the cash-futures basis trade to swap-spread trades can require a much smaller Treasury position.
- • Using Federal Reserve Form PF-based estimates, basis and swap-spread positions together totaled roughly $1.14 trillion, or 47% of the $2.4 trillion in long Treasury exposure reported for large hedge funds in September 2025.
- • The Dallas Fed identified AI data center financing, routed through swaps, as a plausible but unquantified contributor to reduced Treasury futures demand.
- • The researchers distinguish between leverage-driven reallocation and forced liquidation: only the latter, driven by margin or financing calls, is likely to create the liquidity scramble that could spill into Bitcoin and other assets.
Summary
Hedge funds held an estimated $2 trillion in cash US Treasuries at the end of 2025, or about 7% of marketable debt outstanding, according to the Office of Financial Research. Much of this exposure is tied to relative-value trades that seek to capture small pricing differences between bonds and derivatives, most notably the cash-futures basis trade. Funds typically finance the cash bonds through repo and fund the haircut and futures margin with their own capital.
A Dallas Federal Reserve paper published Oct. 16 examined how the funds could pursue a similar business with less Treasury debt. The research found that a swap-spread widener, which buys Treasuries and pays a fixed rate while receiving a floating rate, has recently generated risk-adjusted returns comparable to the basis trade. Because swap-spread positions carry more dollar risk per dollar of notional, a manager allocating the same risk budget needs fewer bonds. In a hypothetical example, a $10 million stress-loss tolerance supports $1 billion in Treasuries under the basis trade but only $500 million under the swap-spread alternative.
Fed position data show the scale of these strategies. Estimated cash-futures basis exposure rose from $213 billion in January 2023 to $832 billion in September 2025, while swap-spread exposure grew from $42 billion to $305 billion. The researchers also found that higher yields have made deliverable bonds more similar for certain long-maturity contracts, reducing the optionality value of the basis trade. They noted that investors seeking long-duration exposure may be using swaps tied to AI data center financing, a route described as plausible but not yet quantifiable.
The data also indicate that the strategies do not always move together. During the April 2025 tariff episode, estimated swap-spread exposure fell from $295 billion to $237 billion, while basis exposure rose from $725 billion to $829 billion before easing to $798 billion in May. These are month-end estimates and do not capture intra-month moves or realized trading flows. The researchers caution that monthly position data alone cannot distinguish forced selling from a shift in portfolio preference.
If hedge funds reduce Treasury holdings, pension funds, overseas investors, banks and households could absorb the supply, likely at higher yields. Stablecoin issuers such as Tether and Circle also hold government securities, but their demand is concentrated in short-term bills. The primary risk, as the research frames it, arises when funds face simultaneous demands for cash from lenders, margin calls or non-renewed repo, which could force bond sales into markets where dealers are reluctant to expand inventories. The IMF has noted that crowded leveraged positions can amplify price moves when reduced together. The Fed's Oct. 27-28 meeting may affect short-term rate expectations that feed into repo financing.
A Dallas Federal Reserve paper published Oct. 16 examined how the funds could pursue a similar business with less Treasury debt. The research found that a swap-spread widener, which buys Treasuries and pays a fixed rate while receiving a floating rate, has recently generated risk-adjusted returns comparable to the basis trade. Because swap-spread positions carry more dollar risk per dollar of notional, a manager allocating the same risk budget needs fewer bonds. In a hypothetical example, a $10 million stress-loss tolerance supports $1 billion in Treasuries under the basis trade but only $500 million under the swap-spread alternative.
Fed position data show the scale of these strategies. Estimated cash-futures basis exposure rose from $213 billion in January 2023 to $832 billion in September 2025, while swap-spread exposure grew from $42 billion to $305 billion. The researchers also found that higher yields have made deliverable bonds more similar for certain long-maturity contracts, reducing the optionality value of the basis trade. They noted that investors seeking long-duration exposure may be using swaps tied to AI data center financing, a route described as plausible but not yet quantifiable.
The data also indicate that the strategies do not always move together. During the April 2025 tariff episode, estimated swap-spread exposure fell from $295 billion to $237 billion, while basis exposure rose from $725 billion to $829 billion before easing to $798 billion in May. These are month-end estimates and do not capture intra-month moves or realized trading flows. The researchers caution that monthly position data alone cannot distinguish forced selling from a shift in portfolio preference.
If hedge funds reduce Treasury holdings, pension funds, overseas investors, banks and households could absorb the supply, likely at higher yields. Stablecoin issuers such as Tether and Circle also hold government securities, but their demand is concentrated in short-term bills. The primary risk, as the research frames it, arises when funds face simultaneous demands for cash from lenders, margin calls or non-renewed repo, which could force bond sales into markets where dealers are reluctant to expand inventories. The IMF has noted that crowded leveraged positions can amplify price moves when reduced together. The Fed's Oct. 27-28 meeting may affect short-term rate expectations that feed into repo financing.
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