Hedge funds have quietly become the largest foreign holders of U.S. Treasury securities, with their holdings even surpassing those of China, Japan, and the United Kingdom. This dynamic has become increasingly critical against the backdrop of the Iran war and the withdrawal of traditional overseas buyers, yet it harbors underlying fragility due to its heavy reliance on purely financial logic.
Since the outbreak of the Iran war, the yield on the 10-year U.S. Treasury note surged by nearly 50 basis points at one point, and several Treasury auctions have shown weak demand, fueling concerns about non-U.S. government selling of Treasuries.
According to Federal Reserve custody data, foreign central banks have sold a cumulative $820 billion in U.S. Treasuries since the war began, reducing their holdings to $2.7 trillion, the lowest level since 2012.
However, the buyers truly worth watching are not central banks, but hedge funds registered in the Cayman Islands. By the end of 2025, hedge funds' net long positions in U.S. Treasuries reached $2.4 trillion, nearly tripling from three years prior. Federal Reserve economists believe there is still an underestimation of $1.4 trillion.
Nevertheless, hedge fund holdings are based purely on arbitrage strategies. Should interest rate trends or market conditions turn unfavorable, a significant amount of capital could unwind positions simultaneously, posing financial stability risks.
Central banks sold $820 billion, but the impact has been limited. The selling of U.S. Treasuries by foreign central banks following the Iran war has drawn widespread market attention.
Fed custody data shows that non-U.S. central banks have offloaded a total of $820 billion in U.S. Treasuries, bringing their stockpile down to $2.7 trillion, a new low since 2012.
However, this scale of selling remains relatively limited within the broader context. The $820 billion is minor compared to the overall stock of U.S. debt, and there are some discrepancies between this data and the more authoritative TIC cross-border capital flow figures.
More importantly, central bank sales are more likely driven by defensive considerations—building foreign exchange reserves during turbulent times—rather than anti-American sentiment, a logic similar to the recent gold sales by the Polish central bank.
Hedge funds quietly become the largest foreign bondholders. Research from the New York Fed indicates that leveraged hedge funds have significantly increased their Treasury holdings since 2018. Data from the U.S. Office of Financial Research shows that by the end of 2025, hedge funds held $2.4 trillion in net long positions and $1.6 trillion in short positions in U.S. Treasuries, nearly triple the amount from three years earlier.
This expansion has been primarily driven by two types of trades: "basis trades" that arbitrage the difference between futures and spot prices, and "swap" trades, which have recently seen explosive growth.
More strikingly, Federal Reserve economists believe that official TIC data underestimates hedge funds' cross-border Treasury holdings by as much as $1.4 trillion. After adjusting for this, "the Cayman Islands is effectively the largest foreign holder of U.S. Treasury securities, with holdings significantly exceeding those of China, Japan, and the UK."
Fed 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, almost equivalent to the total from all other foreign investors combined."
The dual role of hedge funds: Stabilizer or risk source? Industry insiders like Citadel founder Ken Griffin argue that hedge fund participation provides beneficial liquidity support to the market. Their buying effectively cushioned bond market pressure during the Fed's quantitative easing taper.
However, because hedge fund holdings are based purely on arbitrage logic, unfavorable shifts in interest rates or market conditions could trigger a synchronized unwinding of large positions, creating financial stability risks.
Reportedly, some crowded hedge fund positions were "cleaned out" early in the Iran war, but the situation has not worsened further. Long-term asset holders like insurance companies have also not shown significant signs of exiting, leaving the market relatively stable.
Regardless of the current market response, the refinancing pressure facing U.S. Treasury Secretary Scott Bessent is unavoidable. Next year, debt equivalent to 33% of the total U.S. Treasury stock is maturing, requiring the rollover of approximately $10 trillion in new debt.
