Hedge Funds Continue to Bet Against America, Sparking Economic Instability Concerns

On August 20, 2025, hedge funds’ growing influence in the U.S. Treasury market, with record-breaking $3.8 trillion in exposure, has sparked concerns among regulators and policymakers about potential risks to the U.S. economy.

Quartz reported that these funds, leveraging high-stakes basis trades, have become unexpected fiscal watchdogs, forcing political leaders to reconsider risky policies like President Donald Trump’s sweeping tariffs.

However, their heavily leveraged positions in Treasury securities—critical to global financial stability—could trigger market disruptions, raising borrowing costs for households and businesses and threatening economic growth amid an already volatile fiscal landscape.

Hedge Funds’ Role in Treasury Markets

Hedge funds have doubled their Treasury holdings since 2022, reaching $3.8 trillion by March 2025, accounting for 13% of the $29 trillion market, per Quartz and the Office of Financial Research (OFR).

These funds engage in basis trades, borrowing heavily from repo markets to buy “cheaper” cash Treasuries while selling “expensive” futures contracts, amplifying small price differences into large profits.

The top 10 hedge funds, with leverage ratios of 18-to-1, account for 40% of repo borrowing, per OFR data.

While these trades enhance liquidity in stable times, rapid unwinding during market stress, as seen in the March 2020 “dash for cash,” can exacerbate volatility, per Reuters.

The Federal Reserve’s rapid rate hikes from near-zero to 5.5% between 2022 and 2023 drove Treasury price swings, prompting hedge funds to capitalize on these discrepancies.

However, a Bank of England warning in October 2024 highlighted that these $1 trillion basis trades could precipitate a market meltdown if unwound suddenly.

For instance, in April 2025, Trump’s tariff announcements triggered a Treasury selloff, pushing 10-year yields up 17 basis points to 4.425% in a single day, one of the wildest swings in two decades.

Hedge funds, facing margin calls due to falling Treasury prices, sold liquid assets to raise cash, amplifying market stress, according to Bloomberg.

Economic Risks from Hedge Fund Activity

The heavy leverage in hedge fund Treasury trades poses systemic risks to the U.S. economy.

During the April 2025 selloff, swap spreads—the gap between Treasury yields and interest rate swaps—widened to a record 64 basis points, signaling funding pressures.

Torsten Slok of Apollo Global Management estimated the basis trade at $800 billion, noting that rapid unwinding could strain bank liquidity, disrupting the Treasury market’s role as the global financial bedrock.

A Brookings Institution report warned that such disruptions could mirror the 2008 financial crisis, with a broader credit crunch looming if markets struggle to absorb Treasury sales, according to Fortune.

Rising Treasury yields, driven by hedge fund deleveraging, increase government borrowing costs, with fiscal 2024 interest payments already hitting $879.9 billion, or 13% of federal outlays, per Pew Research Center.

Higher yields also raise corporate and household borrowing costs, impacting mortgages and loans.

Moody’s downgrade of U.S. debt in May 2025, citing persistent deficits, further eroded Treasury appeal, with foreign investors reducing holdings as U.S. yields lagged European and Japanese bonds on an FX-hedged basis.

This could force yields higher to attract buyers, squeezing consumer spending, already stagnant per Goldman Sachs’ 1% GDP growth forecast for Q4 2025.

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Hedge Funds as Fiscal Watchdogs

Hedge funds’ influence extends beyond markets, acting as de facto fiscal watchdogs.

Their rapid deleveraging in April 2025 forced Trump to pause tariffs after yields spiked, with Treasury Secretary Scott Bessent noting markets misunderstood the tariff plan’s scope, according to Reuters.

Similarly, UK Chancellor Rachel Reeves adjusted tax policies after hedge fund selloffs pushed gilt yields higher.

Bill Campbell of DoubleLine told Reuters that these “warning signs” of market stress can compel policy reversals, but unchecked leverage risks “bigger things” like the 2020 COVID-era market chaos.

Regulators, including the Bank of England and ECB, have also sounded alarms.

The ECB warned in May 2024 that a Treasury crash could ripple to eurozone bonds due to high correlations.

The SEC’s new data collection on non-centrally cleared repo markets, covering $2 trillion, has aimed to monitor these risks.

Proposals to exclude Treasuries from bank leverage ratios and reduce bond fund liquidity mismatches could mitigate future shocks.

@niamhrowe7 noted, “Hedge funds have a growing ability to save or sink bond markets,” citing their influence on Trump’s tariffs.

Analysts like Andrew Brenner of National Alliance Capital Markets warned that basis trades, leveraged up to 100x, “overwhelmed” markets in April, per Reuters.

However, Beth Hammack of the Cleveland Fed argued that basis trades provide liquidity in calm times.

With Trump’s approval rating at 39% per an ABC News/Washington Post/Ipsos poll, his administration’s tariff-driven policies risk further market volatility, according to Newsweek.

The U.S. debt, at $37 trillion, and a $1 trillion+ primary deficit projected in 2025, heighten Treasury market fragility.

If hedge funds unwind their $800 billion basis trades rapidly, as in March 2020, the Federal Reserve may need to intervene to prevent a credit crunch, according to Fortune.

As consumer spending stagnates and inflation expectations hit 4.9% per the University of Michigan, the economy faces undeniable risks.

Not only must policymakers balance fiscal discipline with market stability to avoid broader economic fallout, but hedge funds will need to be kept on a tighter leash to prevent economic collapse.

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