Wall Street's holdings of U.S. Treasuries have reached the highest level since 2007—does this mark the beginning of the next round of turmoil?

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Wall Street's major dealers are returning to the U.S. Treasury market in the largest scale since the financial crisis, but this seemingly positive shift hardly masks the growing leverage risk accumulating on the other side—the ultra-high leveraged positions of hedge funds have become the most significant hidden danger in the market structure.

According to calculations by the Financial Times based on New York Fed data, the average net positions in Treasuries held by major dealers this year have risen to about $550 billion, close to 2% of the overall market, reaching the highest level since 2007.

The core driving force of this change is the revision of the Enhanced Supplementary Leverage Ratio (eSLR) rules—looser requirements for non-risk-adjusted capital holdings for large banks pushed by the Trump administration have directly opened the door for banks to return to Treasury market-making.

On the other hand, Apollo Global Management’s chief economist Torsten Slok warns that hedge funds’ holdings in the $31 trillion Treasury market have reached a historic peak of 8%, driven by more than $6 trillion in repo agreements and prime brokerage financing leverage. He points out that if these high-leverage positions are forced to unwind simultaneously, “shockwaves could be transmitted to the global fixed income markets,” further affecting equities, corporate bonds, mortgages, and other types of assets.

Improved bank holdings and leveraged risks among hedge funds coexist, forming the core contradiction of the current Treasury market. Whether the market structure is being repaired or accumulating systemic risk in a new way remains controversial.

Regulatory Easing Opens Space for Banks to Hold Treasuries

After the 2008 financial crisis, strict capital regulations led large banks to gradually withdraw from their core role as Treasury market-makers. Now, this trend is quietly reversing.

Michelle Bowman, Fed regulatory board chair appointed by Trump, spearheaded the revision of the eSLR rules. Morgan Stanley confirmed this month that they have used the SLR revision to deploy more capital toward Treasury trading. Bank of America’s head of rate strategy Mark Cabana stated, “In the past few months, dealer Treasury holdings have clearly increased, which is evidence that the SLR has truly had an impact.”

Coalition Greenwich data shows that the six systemically important banks previously held capital exceeding regulatory requirements by an average of 2.4 percentage points. Minal Chotai, the organization’s global capital analytics director, highlighted that with the capital rule adjustments, “the reason to maintain these huge surplus buffers has disappeared,” meaning more capital may be freed up for trading business.

Hedge Funds Quietly Become the Largest Foreign Holder of Treasuries

Over the past decade as traditional market makers exited, hedge funds have quietly filled the core role in the Treasury market.

According to the U.S. Office of Financial Research, by the end of 2025 hedge funds will hold $2.4 trillion in long Treasury positions and $1.6 trillion in short positions, nearly tripling over three years. Fed economists note that official TIC data underestimates hedge fund cross-border holdings by up to $1.4 trillion—after correction, hedge funds registered in the Cayman Islands have actually become the largest foreign holders of U.S. Treasuries, with holdings far exceeding those of China, Japan, and the UK. From 2022 to 2024, hedge funds absorbed 37% of U.S. net issuance of medium and long-term Treasuries, “basically equal to all other foreign investors combined.”

This expansion is mainly driven by “basis trades”—arbitrage of price spreads between Treasury spot and futures, amplified by high leverage. The strategy yields thin profits and is highly dependent on stable financing conditions. During 2020 market turmoil, the Fed had to directly intervene to stabilize markets disrupted by rapid unwinding of hedge fund positions.

Structural Changes Hard to Reverse, Refinancing Pressure Ever Present

Market participants have notably different opinions on this structure.

Jay Barry, JPMorgan’s global head of rates strategy, said: “Primary dealers will not return to their pre-2008 role, and hedge funds and high-frequency traders will take up a larger share—a trend that won’t reverse.”

TD Securities rate strategist Molly Brooks pointed out that if volatility decreases or the Fed cuts rates sharply, hedge funds may actively reduce positions—who will take over then remains an unresolved question. Vanderbilt Law professor Yesha Yadav warned that since banks have no statutory market-making obligations, “removing these asset-liability rules does not guarantee effectiveness.” Barclays global research chair Ajay Rajadhyaksha also believes increased bank holdings are related to regulatory changes, but structural constraints remain fundamentally unresolved.

Against this backdrop, the refinancing pressure from the U.S. Treasury is a definite constraint: next year, debts equivalent to 33% of total Treasuries will mature, requiring about $10 trillion in new issuance, while non-U.S. central banks have already sold over $82 billion in Treasuries, reducing holdings to the lowest since 2012. Former Treasury Secretary Henry Paulson recently publicly called on policymakers to prepare emergency plans in advance for extreme cases of demand collapse. By last Friday’s close, the 10-year Treasury yield was at 4.24%.

Risk Warning and DisclaimerThe market involves risks, and investments should be made cautiously. This article does not constitute individual investment advice, nor does it consider specific investment objectives, financial circumstances, or needs of any individual user. Users should evaluate whether any opinion, viewpoint, or conclusion in this article suits their particular situation. Invest at your own risk. ```