Who is taking over the US debt?

Source: Wall Street Insights

Hedge funds have become the largest overseas holders of U.S. Treasury securities! Since the conflict between Iran and the U.S. began, overseas central banks have cumulatively sold $82 billion worth of U.S. Treasuries, bringing their holdings down to the lowest level since 2012. Meanwhile, hedge funds hold as much as $2.4 trillion, which is triple compared with three years ago. Economists believe the data still underestimates $1.4 trillion.

Hedge funds have quietly become the largest overseas holder of U.S. Treasuries, with their holding size even exceeding those of China, Japan, and the U.K. Against the backdrop of the outbreak of the Iran war and the withdrawal of traditional overseas buyers, this pattern has become even more crucial, yet it also carries vulnerabilities due to its heavy reliance on purely financial logic.

Since the outbreak of the Iran war, the yield on 10-year U.S. Treasuries has at one point jumped by nearly 50 basis points. Several rounds of Treasury auctions performed weakly, and market concerns about non-U.S. governments selling off U.S. Treasuries have continued to intensify.

According to Federal Reserve custody data, after the outbreak of the war, overseas central banks have cumulatively sold $82 billion worth of U.S. Treasuries, and their holdings have fallen to the lowest level since 2012—$2.7 trillion.

However, the buyer that is truly worth watching is not central banks, but hedge funds registered in the Cayman Islands. By the end of 2025, hedge funds hold $2.4 trillion in long U.S. Treasury positions, nearly triple compared with three years ago. Federal Reserve economists believe there remains an underestimation of $1.4 trillion.

However, hedge fund holdings are based purely on arbitrage logic. Once the direction of interest rates or market conditions changes for the worse, large amounts of capital may close positions and flee in sync, triggering financial stability risks.

Central banks sold $82 billion, but the impact is limited

After the outbreak of the Iran war, overseas central banks’ moves to sell U.S. Treasuries drew widespread market attention.

According to Federal Reserve custody data, non-U.S. central banks have cumulatively sold $82 billion worth of U.S. Treasuries, reducing outstanding holdings to $2.7 trillion, the lowest since 2012.

However, this scale of selloff is still limited within the overall picture. $82 billion is insignificant compared with the total stock of U.S. Treasuries, and there are some discrepancies between this data and the more authoritative TIC cross-border capital flow data.

More importantly, central banks’ selling of U.S. Treasuries is more likely driven by defensive considerations—building reserves of foreign-exchange “ammunition” during turbulent times—rather than anti-U.S. sentiment. The recent sale of gold by Poland’s central bank is an example of a similar logic.

Hedge funds have quietly become the largest overseas holder of U.S. Treasuries

Research from the Federal Reserve Bank of New York shows that since 2018, leverage-based hedge funds have significantly increased their holdings of U.S. Treasuries. According to data from the U.S. Office of Financial Research, by the end of 2025, hedge funds hold $2.4 trillion in long U.S. Treasury positions and $1.6 trillion in short positions, nearly triple compared with three years ago.

This expansion is mainly driven by two types of trades: “basis trades” that exploit arbitrage opportunities created by differences between futures and spot prices, and “swap” trades whose scale has recently ballooned rapidly.

More strikingly, Federal Reserve economists believe that the official TIC data underestimates hedge funds’ cross-border holdings by as much as $1.4 trillion. Based on the revised figures, “the Cayman Islands is in practice already the largest overseas holder of U.S. Treasuries, with a holding size significantly larger than China, Japan, and the U.K.”

Federal Reserve economists further noted that between 2022 and 2024, hedge funds “absorbed 37% of the net issuance of U.S. mid- to long-term Treasury securities, almost equal to the sum of all other overseas investors.”

The dual role of hedge funds: stabilizer or risk source

Industry insiders, including Ken Griffin, founder of Citadel, believe that hedge funds’ participation provides beneficial liquidity support to the market. During the period when the Federal Reserve was reducing quantitative easing, their buy-side activity had effectively buffered pressure on the bond market.

However, hedge fund holdings are based purely on arbitrage logic. If interest-rate trends or market conditions change unfavorably, a large amount of capital may close positions and flee in sync, triggering risks to financial stability.

It is understood that at the beginning of the Iran war outbreak, some crowded hedge fund positions were “cleansed,” but the situation has not deteriorated further. Long-term asset holders such as insurance companies have not yet shown any significant signs of exiting; the market remains relatively steady.

No matter how the market responds now, the refinancing pressure facing U.S. Treasury Secretary Scott Bessent cannot be ignored. Next year, the U.S. will have debt maturing equal to 33% of the total amount of U.S. Treasuries, requiring the rolling issuance of about $10 trillion in new debt.

Risk warning and disclaimer terms

The market is risky; investment requires caution. This article does not constitute personal investment advice, nor does it consider any specific investment goals, financial conditions, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are consistent with their specific circumstances. Invest accordingly; responsibility lies with you.

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