Hedge Funds Hold a Record 7% of the US Treasury Market: How the Treasury Basis Trade Could Hit India If They Sell

Hedge funds hold $2 trillion of US Treasuries, a record 7%. US 10-year yield 5.23%. India 10-year 7.18%. Basis trades reportedly down 20% in 2026.

Hedge funds have become one of the biggest buyers in the roughly $30 trillion US Treasury market, the pool of government debt that sets the price of money around the world. Their buying has grown while Treasury yields climbed to the highest level since 2007, which is why the question of what happens if hedge funds sell US Treasuries has moved from academic to urgent.

This guide explains why hedge funds hold so much of the US Treasury market, how the Treasury basis trade works, how leverage and margin calls could trigger forced selling as they did in March 2020, and what a sell-off would mean for Indian investors through liquidity, the rupee and foreign flows. Figures come from the Office of Financial Research, Fed data and market reports, so recheck them before you act.

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Why Are Hedge Funds Buying in the US Treasury Market?

Hedge funds buy in the US Treasury market mainly for the basis trade, a strategy that earns a thin spread between cash Treasuries and futures and is magnified with borrowed money. Their cash Treasury holdings reached $2 trillion at the end of 2025, nearly three times the level five years earlier, and a record 7% of the $28.9 trillion of marketable Treasury debt.

A second reason is demand. Traditional buyers such as pension funds have been shifting toward private credit, which left room for hedge funds to fill the gap in the US Treasury market. Hedge funds also added roughly $87 billion of Treasuries in the first half of 2026, according to market reports.

What Is the Treasury Basis Trade?

The Treasury basis trade is a bet that the price of a cash Treasury and the price of the matching futures contract will converge. The steps are simple, and the risk lies in the borrowing:

1. The fund buys a cash Treasury bond or note.
2. It sells the matching Treasury futures contract, locking in the small price gap.
3. It borrows against the bond in the repo market to scale up the position.
4. It collects the narrow spread when cash and futures prices converge.

Because the gap is tiny, funds borrow heavily. One industry executive described these trades as thin-margin positions that can often be levered 20 times or more, and that leverage is what makes the trade fragile. It is also one of the main reasons hedge funds now hold so much of the US Treasury market.

Hedge Funds in the US Treasury Market: Key Numbers

US Treasury market measure	Figure	Context
Size of the US Treasury market	About $30 trillion	Foundation of the global financial system
Marketable Treasury debt	$28.9 trillion	End of 2025
Hedge fund cash Treasury holdings	$2.0 trillion	Nearly triple the level five years earlier
Hedge fund share of the market	7%	A record, per the Office of Financial Research
Hedge fund short futures positions	$1.4 trillion	A large share is likely the basis trade
Leveraged basis-trade positions	About $1.2 trillion	Reportedly down about 20% this year, per Morgan Stanley estimates
US 10-year yield	5.23%	Highest since July 2007

A 7% share is not a controlling stake, but it is large for investors who rely on borrowed money. That mix is why the behaviour of hedge funds matters for the whole US Treasury market.

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What Happens If Hedge Funds Sell US Treasuries?

If hedge funds sold Treasuries in a hurry, prices in the US Treasury market would fall and yields would rise, and the move could feed on itself. The Office of Financial Research says that a spike in repo rates or an abrupt rise in futures margin requirements could force funds to unwind positions rapidly. This is a stress scenario, not a forecast.

1. A trigger such as higher repo rates, larger futures margins or a volatility spike squeezes the funds’ cash.
2. Lenders ask for more collateral, so funds sell cash Treasuries and buy back their short futures.
3. Heavy selling pushes Treasury prices down and yields up, causing losses for other holders and more margin calls.
4. Liquidity thins out, and in extreme stress the central bank may have to step in.

The market saw a version of this in March 2020, when liquidity in the US Treasury market deteriorated sharply and leveraged funds had to unwind quickly. The Federal Reserve responded with large Treasury purchases to restore order.

The Case That Hedge Funds Help the US Treasury Market

Not every expert sees danger. The president of Hedge Fund Research has argued that hedge funds are active traders and not buy-and-hold investors, so they can provide liquidity on both sides of the market and may smooth swings in rates. Fed data also shows hedge funds remained net buyers through the second quarter of 2026.

There are signs of caution too. Leveraged basis-trade positions have reportedly fallen about 20% this year to $1.2 trillion, which suggests funds are becoming more selective as the sell-off in Treasuries deepens. A smaller trade means less forced selling if stress arrives in the US Treasury market.

Why Are US Treasury Yields Rising?

The 10-year yield rose to 5.23% in late September, its highest since July 2007, after climbing nearly 50 basis points in the month, the biggest monthly jump in almost two years. Earlier in September it traded just below 4.8%. The 30-year yield also reached its highest level since 2002 on 29 September.

Three forces are behind the move: sticky inflation, expectations of further Fed rate hikes, and heavy bond supply, including borrowing by companies to fund AI investment. One strategist said issuance mattered more than inflation this year. Higher yields raise borrowing costs for governments, companies and households alike, and they test the funding of every leveraged position in the US Treasury market.

What Does the US Treasury Market Mean for India?

Higher US yields tend to pull money out of emerging markets and pressure the rupee. India’s 10-year bond yield was near a two-year high of 7.18% on 29 September, while Brent crude traded above $106 a barrel. A weaker rupee makes imported oil costlier, which adds to inflation and can keep Indian yields elevated.

Indicator	Latest reading	Why it matters for India
US 10-year yield	5.23%	Sets the global benchmark for borrowing costs
India 10-year yield	7.18% (29 September)	Near a two-year high
Brent crude	Above $106 a barrel	Raises India’s import bill and inflation risk
India retail inflation, August	4.82%	Context for the RBI’s policy stance

Indian equities opened weak on 1 October, with the Nifty 50 sliding toward the 22,600 level and the Sensex lower, while autos and realty came under selling pressure and crude oil rose. A disorderly move in the US Treasury market could add to foreign selling.

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What Should Investors Watch Next in the US Treasury Market?

1. Repo rates and futures margin requirements, the two triggers regulators flag most often for the US Treasury market.
2. Hedge fund positioning in the basis trade, now reportedly near $1.2 trillion.
3. The 10-year yield against its 5.23% peak and the 30-year against its 2002-era highs.
4. Fed and Office of Financial Research data on who is buying and selling Treasuries.
5. India’s 10-year yield, the rupee and foreign portfolio flows.

Conclusion

Hedge funds now own a record share of the US Treasury market, and much of it rests on borrowed money. That makes them both a source of liquidity and a possible source of forced selling. Data so far shows them still buying in the US Treasury market, with the basis trade shrinking, so the stress scenario remains a risk to monitor and not a base case. Indian investors should watch Treasury yields, the rupee and foreign flows, and consult a SEBI-registered advisor before making any decision.

Frequently Asked Questions

How much of the US Treasury market do hedge funds own?

Ans. Hedge funds held about $2 trillion of cash Treasuries at the end of 2025, a record 7% of the $28.9 trillion of marketable Treasury debt. That is nearly three times their holdings five years earlier, according to the Office of Financial Research.

What is the Treasury basis trade?

Ans. The basis trade means buying a cash Treasury and selling the matching futures contract to capture a small price gap. Funds usually borrow in the repo market to scale it up, often with leverage of 20 times or more.

What happens if hedge funds sell US Treasuries?

Ans. Forced selling would push Treasury prices down and yields up, and could trigger more margin calls and thinner liquidity. Regulators say a spike in repo rates or futures margins could start such a chain reaction in the US Treasury market.

Why are US Treasury yields rising?

Ans. The 10-year yield reached 5.23%, its highest since 2007, because of sticky inflation, expectations of more Fed rate hikes and heavy bond issuance, including borrowing linked to AI investment.

Are hedge funds buying or selling Treasuries now?

Ans. Fed data shows hedge funds remained net buyers through the second quarter of 2026. Leveraged basis-trade positions have reportedly fallen about 20% this year to $1.2 trillion, which points to more selective buying in the US Treasury market.

How does the US Treasury market affect India?

Ans. Higher US yields can lead to foreign investor outflows and pressure on the rupee. That raises the cost of imports such as crude oil and can keep India’s 10-year yield, near 7.18%, elevated.

What happened in the US Treasury market in March 2020?

Ans. Treasury market liquidity deteriorated sharply in March 2020 and leveraged funds had to unwind positions quickly. The Federal Reserve stepped in with large Treasury purchases to stabilise trading.

Should Indian investors worry about hedge funds selling Treasuries?

Ans. This article does not constitute investment advice. Hedge fund selling in the US Treasury market is a risk scenario and not a forecast, but rising US yields can affect the rupee and foreign flows. Consult a SEBI-registered financial advisor before investing.