Author：Wall Street CN
Hedge funds have quietly become the largest foreign holders of U.S. Treasury bonds, with their holdings even exceeding those of China, Japan, and the United Kingdom.This pattern has become increasingly crucial against the backdrop of the outbreak of the Iranian war and the withdrawal of traditional overseas buyers, but it is also inherently vulnerable due to its high reliance on purely financial logic.
Since the outbreak of the war with Iran, the yield on 10-year US Treasury bonds has jumped by nearly 50 basis points, and many Treasury auctions have been weak, with market concerns about non-US governments selling off US Treasury bonds continuing to rise.
According to Federal Reserve custody dataSince the outbreak of the war, foreign central banks have sold a total of $82 billion in U.S. Treasury bonds, bringing their holdings down to $2.7 trillion, the lowest level since 2012.
However, the buyers that are truly worth paying attention to are not central banks, but hedge funds registered in the Cayman Islands.By the end of 2025, hedge funds held $2.4 trillion in long positions in U.S. Treasury bonds, nearly tripling their positions three years prior. Federal Reserve economists believe there is still a $1.4 trillion undervaluation.
However, hedge fund positions are based on a purely arbitrage logic, and if interest rate trends or market conditions change adversely,A large amount of capital may be liquidated and flee simultaneously, triggering financial stability risks.
The central bank sold off $82 billion, but the impact was limited.
Following the outbreak of the Iran-Iraq War, the actions of foreign central banks in selling US Treasury bonds have attracted widespread market attention.
According to Federal Reserve custody dataNon-US central banks have sold a total of $82 billion in US Treasury bonds, bringing the outstanding amount down to $2.7 trillion, a new low since 2012.
However, this sell-off is still limited within the overall picture. $82 billion is negligible compared to the total stock of US Treasury bonds, and this figure differs somewhat from the more authoritative TIC cross-border capital flow data.
More importantly, central banks are more likely to sell US Treasury bonds out of defensive considerations of stockpiling foreign exchange reserves during turbulent times, rather than out of anti-American sentiment—the recent sale of gold by the Polish central bank follows a similar logic.
Hedge funds have quietly become the largest holders of foreign debt.
Research from the Federal Reserve Bank of New York shows that leveraged hedge funds have significantly increased their holdings of U.S. Treasuries since 2018. According to data from the Office of Financial Research, by the end of 2025, hedge funds will hold $2.4 trillion in long positions and $1.6 trillion in short positions in U.S. Treasuries, nearly tripling in value compared to three years ago.
This expansion was primarily driven by two types of transactions:"Basis trading," which exploits the price difference between futures and spot markets, and "swaps," which have recently seen a rapid expansion in scale.
Even more impactful is the claim by Federal Reserve economists that official TIC data underestimates hedge fund cross-border holdings by as much as $1.4 trillion. Based on this correction, "the Cayman Islands is effectively the largest foreign holder of U.S. Treasury securities, with holdings significantly exceeding those of China, Japan, and the United Kingdom."
Federal Reserve economists further pointed out that between 2022 and 2024, hedge funds..."It absorbed 37% of the net issuance of U.S. medium- and long-term Treasury bonds, almost equivalent to the total of all other foreign investors."
The dual role of hedge funds: stabilizers or sources of risk?
Industry insiders, including Citadel founder Ken Griffin, believe that the participation of hedge funds has provided beneficial liquidity support to the market, and their buying has effectively buffered the pressure on the bond market during the Federal Reserve's tapering of quantitative easing.
However, hedge fund holdings are based on a purely arbitrage logic.If interest rates or market conditions change unfavorably, a large amount of capital may be liquidated and flee simultaneously, triggering financial stability risks.
It is understood that at the outset of the Iran-Iraq War, some crowded hedge fund positions were "cleansed," but the situation has not yet deteriorated further. Long-term asset holders such as insurance companies have not yet shown significant signs of exiting the market, and the market remains relatively stable.
Regardless of how the market responds at present, the refinancing pressures facing U.S. Treasury Secretary Scott Bessent cannot be ignored.Next year, the United States will have 33% of its total debt maturing, requiring the issuance of approximately $10 trillion in new debt.
