A shift in who buys U.S. Treasuries — away from central banks and toward hedge funds — is amplifying volatility in the bond market, analysts say, as long-term U.S. yields climb and unease spreads through fixed income. Because yield-sensitive hedge funds can demand higher rates as concerns over national debt and inflation mount, Washington's borrowing costs and fiscal burden could rise together.
Britain held $939.9 billion of U.S. Treasuries as of June, according to U.S. Treasury Department data released on the 1st. That ranks second behind Japan, which held $1.1167 trillion.
Britain overtook China last year to become the second-largest foreign holder of U.S. government debt. Analysts attribute the shift to a large inflow of hedge fund money routed through London, the financial center. The Cayman Islands, a well-known tax haven, ranks among the top holders with $434.2 billion, which analysts say reflects the same dynamic.
Research points to the growing sway hedge funds hold over the Treasury market. Large hedge funds had total exposure to U.S. Treasuries of about $4 trillion as of September 2025, according to a report by Philip Monin, a senior economist at the Federal Reserve. That is double the level since 2023. Short positions betting on falling Treasury prices accounted for $1.6 trillion, while long positions accounted for $2.4 trillion. The long positions alone amount to 8.5% of all outstanding U.S. Treasuries.
The Financial Times said the figures mean hedge funds hold far more U.S. Treasuries than China or Japan, and more than the entire U.S. mutual fund industry or the whole banking sector.
The changing character of the money flowing into Treasuries has raised concern that fiscal strain and inflation worries will feed through to yields more sharply. Official investors such as central banks and government agencies once provided steady demand. They were relatively insensitive to rate swings and inclined to hold for the long term, acting as a buffer for the market. Private investors chasing short-term returns, including hedge funds, now make up a growing share. Hedge funds in particular can demand higher yields if they judge the U.S. budget deficit and debt-servicing burden to be a risk.
Reuters said upward pressure on Treasury yields is building as yield-sensitive private investors such as hedge funds partly replace official investors like central banks.
The yield on the 10-year U.S. Treasury note traded in Asia climbed to 4.81% on the 2nd, its highest in about three years. Some market watchers say global financial markets could be rattled if the yield approaches 5%. Japan's 10-year yield topped 3%, a 30-year high, while Australia's 10-year yield rose to 5.198%, its highest in 15 years.
"Bond investors are increasingly demanding a higher term premium to account for inflation risk, deteriorating public finances and the sheer volume of government debt being issued into the market," said Charu Chanana, chief investment strategist at Saxo Bank.
