Rising leverage among hedge funds in US government bonds is increasing the risk of abrupt market dislocations that could reverberate through global fixed income markets, according to a report by Bloomberg citing comments by Apollo Global Management chief economist Torsten Slok.
Slok estimates that hedge funds now account for roughly 8% of the $31tn US Treasury market, up from around 3% five years ago, driven by increased use of leverage through repurchase agreements and prime brokerage financing. Total borrowed exposure is now believed to exceed $6tn.
He warned that any forced unwinding of these highly leveraged positions could trigger sharp moves in bond prices and create wider instability across global markets.
The concern adds to growing scrutiny of the role hedge funds play in US government debt markets, particularly through relative-value strategies such as the cash-futures basis trade. These trades typically rely on small pricing gaps between Treasury securities and futures contracts, amplified by significant borrowing.
Such strategies came under pressure during the pandemic-era market shock, when a rapid spike in funding costs forced widespread deleveraging and contributed to severe volatility in the Treasury market, ultimately prompting intervention from the Federal Reserve.
Regulators and policymakers have repeatedly flagged the increasing scale of hedge fund participation in government bond markets as a potential source of systemic risk, given the reliance on short-term funding and high levels of leverage.
Separate estimates from the Federal Reserve suggest hedge fund holdings of Treasury securities have at times exceeded 10% of the market, underscoring the scale of their footprint in a key segment of global financial infrastructure.
Recent commentary from policymakers and economists has renewed calls for contingency planning to address potential stress scenarios in US sovereign debt markets, particularly amid concerns over rising fiscal deficits and shifting investor demand.
