CryptoSlate
Hedge funds held an estimated $2 trillion in cash US Treasuries at the end of 2025, about 7% of all marketable debt, according to the Office of Financial Research. Most of that exposure exists to run leveraged relative-value trades, chiefly the cash-futures basis trade, and Federal Reserve estimates put basis positions at $832 billion and swap-spread positions at $305 billion as of September 2025. Together they accounted for roughly $1.14 trillion, or 47%, of the $2.4 trillion in long Treasury exposure at large hedge funds.
Why it matters
Dallas Fed research published Oct. 16 found that the swap-spread widener, a competing strategy pairing a Treasury purchase with an interest-rate swap, has recently earned risk-adjusted returns comparable to the basis trade while exposing a fund to more dollar risk per $1 of notional. That means a manager allocating the same risk budget needs fewer bonds: a $10 million stress-loss allowance supports $1 billion of Treasuries on a basis position that loses 1%, but only $500 million on a swap-spread position that loses 2%. Ordinary portfolio decisions alone could strip hundreds of billions from bond demand.
The government would then need other buyers, likely at higher yields. Stablecoin issuers Tether and Circle, whose USDC reserve model also leans on government securities, buy only short-term bills and cannot replace demand for longer maturities. The researchers also flagged AI data center financing through swaps as a plausible, unquantified demand displacer.
Market impact
April 2025 offered a live test: during the tariff episode, estimated swap-spread exposure fell 20% from $295 billion to $237 billion, about $60 billion unwinding, while basis exposure actually rose from $725 billion to $829 billion. Monthly data show the strategies do not liquidate in parallel, and the 2020 comparison is calmer still: the basis estimate fell 27% during the pandemic-era Treasury seizure.
For Bitcoin, the researchers' framing limits strong claims. Funds needing immediate cash sell whatever is liquid, and tighter dealer financing can hit other leveraged investors, but a BTC decline alongside a Treasury selloff would not establish causation. The Fed's Oct. 27-28 meeting could shift repo financing expectations, and the more telling signal will be successive reporting periods where bond demand falls while funding markets keep operating normally.
Frequently asked questions
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How much US government debt do hedge funds currently hold?
An estimated $2 trillion in cash Treasuries at the end of 2025, roughly 7% of marketable debt outstanding, per the Office of Financial Research. Hedge funds also carried about $1.4 trillion in short Treasury futures positions.
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What is the cash-futures basis trade?
Funds buy Treasury securities that are cheap relative to futures and sell the futures, aiming to profit from the price gap while hedging rate exposure. The bonds are typically financed with repo, a collateralized loan arrangement.
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Why could hedge funds reduce their Treasury demand?
Dallas Fed research found the swap-spread widener strategy earns comparable risk-adjusted returns but needs fewer bonds per unit of risk. A $10 million stress-loss allowance supports $1 billion of Treasuries on the basis trade but only $500 million on the swap version.
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What happened to these trades during the April 2025 tariff episode?
Estimated swap-spread exposure fell 20%, from $295 billion to $237 billion, about $60 billion unwinding, while basis exposure rose from $725 billion to $829 billion. The month-end data show the two strategies did not liquidate in parallel.
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Does this Treasury shift matter for Bitcoin?
Only through funding stress channels: funds needing immediate cash sell liquid assets, and tighter repo or dealer financing can hit other leveraged investors. A Bitcoin decline alongside a Treasury selloff would not by itself establish causation.
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