Hedge funds’ $6.6T leverage raises U.S. Treasury unwind risk

Hedge funds have built a record $6.6 trillion in gross notional leverage to finance trades in U.S. Treasuries, raising the prospect of a rapid unwind if Treasury volatility spikes.

Many positions are in the basis trade, where funds arbitrage small price gaps between Treasury futures and cash securities while hedging interest-rate exposure. On a gross notional basis, hedge funds account for about 8% to 10.3% of the $31 trillion U.S. Treasury market. These trades are financed mainly through repurchase agreements and prime brokerage lines, often with minimal or no initial collateral, known in the market as “zero haircuts”, which makes positions sensitive to margin calls.

The International Monetary Fund’s April 2026 report noted some hedge funds have become “systemically important”, meaning stress at one firm could threaten financial stability. The Federal Reserve and the Bank of England have cautioned that crowded positioning in Treasuries raises vulnerability to market stress. Torsten Slok, chief economist at Apollo Global Management, warned a forced unwind could send “global fixed-income shockwaves”.

Repo borrowing by hedge funds has more than tripled since 2019, and prime brokerage borrowing has roughly doubled since 2022 to about $3.2 trillion. Arbitrage profits on these trades are often fractions of a cent, so funds typically leverage 40x to 60x their capital. That high leverage increases sensitivity to small yield moves or tighter margin requirements.

Analysts point to triggers that could prompt margin calls and forced selling: a sudden spike in Treasury volatility, disruptions in the repo market, or political shocks. If many funds had to sell at once and dealers could not absorb the flow, liquidity could dry up quickly, a pattern observed during the 2019 repo strain and the March 2020 market turmoil.

Molly Brooks, an interest-rate strategist at TD Securities, warned hedge funds could “exit rapidly” if volatility rises or arbitrage opportunities narrow and questioned who would absorb supply; nearly $10 trillion in Treasuries are due to mature and roll over next year. Former Treasury Secretary Henry Paulson urged policymakers to prepare contingency plans for scenarios in which demand for U.S. Treasuries falls sharply.

Other market researchers note the record hedge fund positioning reflects a shift in who holds U.S. debt rather than a collapse in demand. William Merz, head of capital markets research at U.S. Bank Asset Management Group, pointed to rising Treasury holdings by individual investors and mutual funds and noted there is no sign of an overall drop in demand.

Market moves this week were modest: the 10-year Treasury yield fell about 6.5 basis points to 4.24%, partly on investor hopes for a ceasefire in the Middle East. Market participants continue to monitor liquidity and funding conditions because modest price moves can trigger margin calls on highly leveraged trades.