``` Hedge funds make record bets on U.S. Treasuries; Apollo warns: a reversal could trigger "shockwaves" in global bond markets. ```

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Hedge funds' share in the U.S. Treasury market has risen to a historic peak, behind which over $6 trillion of leveraged capital is being mobilized, fueling growing market concerns about potential risks.

On April 17 local time, Apollo Global Management's chief economist Torsten Slok disclosed in a research report that hedge funds' holdings in the $31 trillion U.S. Treasury market recently climbed to 8%, reaching a historic high.

Slok warned that these positions heavily depend on borrowed funds, with over $6 trillion supported by repo agreements and prime brokerage financing. If the market becomes volatile and these high-leverage positions are forced to unwind en masse, "it could send shockwaves through the global fixed income market."

The U.S. Treasury market provides the pricing foundation for the global financial system. Any sharp fluctuation would quickly spread to equities, corporate bonds, mortgages, and various financing markets.

The Leverage Logic of "Basis Trades"

One of the core strategies driving hedge funds' large-scale participation in the Treasury market is so-called "basis trade" — arbitrage that exploits tiny price differences between cash treasuries and futures, then amplifies returns with high leverage.

This strategy itself offers very limited profit margins and depends heavily on borrowing to generate meaningful returns. For this reason, if market volatility rises or financing conditions tighten, holdings may be forced to reduce positions rapidly, resulting in a stampede effect.

It is noteworthy that Fed economists have previously pointed out in research reports that official data may be understating hedge funds’ actual participation scale in the Treasury market, suggesting true risk exposure may be larger than the known figures.

A Crisis May Not Be Imminent, But Structural Risks Exist

Not everyone believes risk is about to explode.

TD Securities rate strategist Molly Brooks said the rising share of hedge fund holdings mostly reflects the market environment of the past two years — high yields and high volatility make Treasuries more attractive for fast-trading investors, rather than signaling an impending crisis.

But Brooks also pointed out a deeper issue: If hedge funds decide that Treasuries no longer offer enough arbitrage opportunities and choose to retreat, who will pick up the slack?

She said that if volatility drops and the Fed cuts rates more than expected, the appeal of yields weakens, hedge funds may proactively cut positions, leaving the market needing other buyers to absorb the supply of Treasuries.

Market Structure Has Quietly Changed

William Merz, Head of Capital Markets Research at U.S. Bank Asset Management Group, examines this phenomenon from a broader historical perspective.

He pointed out that after the 2008 global financial crisis, tighter regulations reduced the ability of large banks and dealers to use their own assets to absorb Treasury supply, gradually shifting this function to non-bank institutions such as hedge funds.

The result: the market may be more prone to episodic volatility. But Merz emphasized that this structural change has not fundamentally altered the medium- to long-term pricing of Treasuries, nor has it shown signs of a collapse in overall demand.

He also mentioned that the share of individual investors and mutual funds in Treasury holdings continues to rise. Although "selling U.S. assets" discussions occasionally appear in the market, this trend has yet to be substantively reflected in holding data.

These concerns are not isolated. On the day before Slok released his research report, former Treasury Secretary Henry Paulson publicly called on policymakers to formulate emergency plans in advance to deal with the extreme situation in which demand for Treasuries collapses.

As of Friday’s close, the yield on the 10-year Treasury fell 6.5 basis points to 4.24%, as investors hoped for an easing of tensions regarding the Iran situation.

Risk Warning and DisclaimerThe market involves risks and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of any individual user. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstance. Investing accordingly is at your own risk. ```