Key facts
- Hedge funds' gross U.S. Treasury exposures reached $4.0 trillion as of September 2025.
- The cash-futures basis trade, a popular strategy, has grown to approximately $830 billion.
- This trade now constitutes 35% of hedge funds' total long Treasury exposures.
- Hedge funds hold about 8.5% of total privately held Treasuries, up from 4.5% in early 2023.
- The trade is reportedly losing steam as the price differences between futures and underlying securities narrow.
Hedge funds' most popular trade in the U.S. bond market, known as the cash-futures basis trade, is showing signs of reaching its limit as the price differences between Treasury bond futures and the underlying securities narrow. This strategy, which relies heavily on borrowed cash to amplify bets on these small price discrepancies, has driven a significant increase in hedge fund exposure to Treasuries.
According to a Federal Reserve report, hedge funds' gross U.S. Treasury exposures doubled to $4.0 trillion between 2023 and September 2025. The cash-futures basis trade alone grew to approximately $830 billion by September 2025, about double its previous peak in early 2020. This represents 35% of their total long Treasury exposure, which is dominated by arbitrage strategies. Overall, hedge funds' Treasury securities holdings increased from about 4.5% to 8.5% of total outstanding Treasuries during this period.
Other significant arbitrage strategies employed by hedge funds include swap spread trades, which reached about $305 billion, and maturity-matched trades totaling $395 billion. The report also identified substantial positioning in steepener-like trades amounting to $375 billion. To finance these positions, hedge funds have heavily utilized repo markets, with their repo cash borrowing growing to $3.0 trillion as of September 2025. The concentration of these activities is also notable, with the 50 largest funds accounting for approximately 90% of the total gross Treasury exposures.