Major Wall Street dealers are returning to the U.S. Treasury market on the largest scale since the financial crisis. However, this seemingly positive market change cannot hide the continuously accumulating leverage risks on the other side — the ultra-high leverage positions of hedge funds have become the most prominent hidden danger in the current U.S. Treasury market structure, bringing uncertainty to market stability.
Comprehensive public data and relevant calculations show that based on data released by the Federal Reserve Bank of New York, the average net position of Treasury bonds held by major Wall Street dealers has risen to about $550 billion so far this year, accounting for nearly 2% of the overall U.S. Treasury market, hitting the highest level since 2007, highlighting the intensity of dealers' return to the U.S. Treasury market.
The core driver of this market change stems from the revision of the Enhanced Supplementary Leverage Ratio (eSLR) rule — the Trump administration promoted the relaxation of non-risk-adjusted capital requirements that large banks must hold. This regulatory adjustment directly opened the channel for banks to return to U.S. Treasury market-making business, creating conditions for dealers to increase their U.S. Treasury holdings.
On the other hand, Torsten Slok, chief economist at Apollo Global Management, warned that the proportion of hedge funds' holdings in the $31 trillion U.S. Treasury market has risen to a historical peak of 8%, supported by more than $6 trillion in repurchase agreements and prime brokerage financing to leverage. He clearly pointed out that once these high-leverage positions are forced to be liquidated centrally, "it may transmit shockwaves to the global fixed-income market", which will further spread to various related markets such as stocks, corporate bonds and mortgages, triggering a chain reaction.
The improvement in banks' U.S. Treasury holdings coexists with the leverage risks of hedge funds, forming the core contradiction of the current U.S. Treasury market. There are still obvious disputes among all market participants about whether the current U.S. Treasury market structure is gradually recovering or accumulating systemic risks in a new way, and no unified judgment has been formed yet.
Regulatory Relaxation Opens Up Space for Banks to Hold Bonds
After the 2008 financial crisis, strict capital regulatory policies prompted large banks to gradually withdraw from their core role in U.S. Treasury market-making. This trend has quietly reversed in recent years, with banks re-increasing their participation in the U.S. Treasury market.
Michelle Bowman, Chairman of the Federal Reserve's Board of Governors appointed by Trump, led the revision of the eSLR rule. Morgan Stanley confirmed this month that it has deployed more capital for U.S. Treasury trading business with the opportunity of the SLR rule revision. Mark Cabana, head of U.S. Bank's interest rate strategy, said, "Over the past few months, dealers' Treasury holdings have increased significantly, which is strong evidence that the SLR rule adjustment has indeed had a practical impact."
Data released by Coalition Greenwich shows that the capital held by the six systemically important banks previously exceeded the regulatory requirements by an average of 2.4 percentage points. Minal Chotai, global head of capital analysis at the institution, pointed out that with the adjustment of capital regulatory rules, "the reason for maintaining these huge excess capital buffers no longer exists", which means that more capital is expected to be released to related business areas such as U.S. Treasury trading.
Hedge Funds Quietly Become the Largest Foreign Bond Holder
In the more than ten years since traditional market makers gradually withdrew from the U.S. Treasury market, hedge funds have quietly filled the market gap and become one of the core participants in the U.S. Treasury market.
According to data released by the Office of Financial Research, as of the end of 2025, hedge funds held $2.4 trillion in long positions and $1.6 trillion in short positions in U.S. Treasury bonds, nearly tripling in size compared with three years ago. Federal Reserve economists further pointed out that the official TIC data underestimates hedge funds' cross-border U.S. Treasury holdings by as much as $1.4 trillion — after revision, hedge funds registered in the Cayman Islands have actually become the largest foreign holders of U.S. Treasury bonds, with holdings significantly exceeding those of traditional holding countries such as China, Japan and the United Kingdom. Between 2022 and 2024, hedge funds absorbed 37% of the net issuance of U.S. medium and long-term Treasury bonds, "almost equivalent to the sum of all other foreign investors".
The expansion of hedge funds' scale in the U.S. Treasury market is mainly driven by "basis trading" — arbitraging the spread between Treasury cash and futures, and amplifying investment returns through high leverage. This trading strategy has extremely thin profit margins, is highly dependent on stable financing conditions, and has weak risk resistance. During the 2020 U.S. Treasury market turmoil, the Federal Reserve had to directly intervene in the market to stabilize the disorderly market caused by the rapid liquidation of hedge fund positions.
Structural Changes Are Difficult to Reverse, Refinancing Pressure Looms
There are obvious differences in the judgments of all market participants on the current structural changes in the U.S. Treasury market, and no consensus has been formed yet.
Jay Barry, head of global interest rate strategy at JPMorgan Chase, said bluntly: "Primary dealers will not return to their pre-2008 market role, and the pattern in which hedge funds and high-frequency traders account for a larger share of the U.S. Treasury market will be difficult to reverse."
Molly Brooks, interest rate strategist at TD Securities, pointed out that if market volatility decreases or the Federal Reserve implements a sharp interest rate cut, hedge funds may take the initiative to reduce their U.S. Treasury positions — at that time, who will take over these reduced positions remains a key unresolved issue. Yesha Yadav, professor at Vanderbilt Law School, warned that since banks have no legal obligation to make markets in U.S. Treasury bonds, "revoking these balance sheet-related rules cannot guarantee that banks will continue to increase their U.S. Treasury market-making efforts". Ajay Rajadhyaksha, chairman of Barclays Global Research, also believes that although the increase in banks' U.S. Treasury holdings is related to changes in regulatory rules, the structural constraints restricting banks' participation in the U.S. Treasury market have not been fundamentally eliminated.
Against this background, the refinancing pressure faced by the U.S. Treasury has become a deterministic constraint: next year, 33% of the total U.S. Treasury bonds will mature, requiring the rollover issuance of about $10 trillion in new bonds to repay the maturing debt; at the same time, non-U.S. central banks have sold a total of more than $82 billion in U.S. Treasury bonds, and their holdings of U.S. Treasury bonds have dropped to the lowest level since 2012, further intensifying the refinancing pressure of U.S. Treasury bonds. Henry Paulson, former U.S. Treasury Secretary, recently publicly called on policymakers to formulate emergency plans in advance to prevent the extreme situation of a collapse in U.S. Treasury demand. As of last Friday's close, the 10-year U.S. Treasury yield was 4.24%.
Risk Warning and Disclaimer
The market is risky, and investment needs to be cautious. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial situation or needs of individual users. Users should consider whether any opinions, views or conclusions in this article are in line with their specific situation. Investment based on this is at the user's own risk.
+1 6269975768
微信
Teams