The share of hedge funds in the U.S. government bond market has reached a historical high, backed by more than $6 trillion in borrowed funds, which is intensifying market concerns about potential risks.

On April 17, local time, Thorsten Sloek, Chief Economist at Apollo Global Management, reported in an analytical report published that day that the share of hedge funds in the $31 trillion U.S. government bond market has recently risen to 8%, which is a record figure across the entire history of the market.

Sloek warns that these positions depend to a large extent on borrowed capital fueled by more than $6 trillion in repo transactions and financing from prime brokers. In the event of volatility in the market and forced mass unwinding of these highly levered positions, "this could transmit shockwaves to the global fixed-income instruments market."

The U.S. government bond market is the foundation for pricing in the global financial system. In the case of sharp fluctuations, its influence spreads quickly to equity markets, corporate bonds, mortgage loans, and other financial venues.

Logic of leverage in "basis trades"
Hedge funds participate in the Treasury market on a large scale, and one of the main strategies is the so-called "basis trade" (basis trade)— an arbitrage of price differences between the spot market for government bonds and their futures, using high leverage to increase returns.

This strategy initially assumes a minimal profit margin and requires substantial borrowed funds to generate meaningful income. For this reason, if market volatility increases or financing conditions become tighter, position holders may be forced to quickly cut back their positions, triggering a domino effect.

It is worth noting that economists at the Federal Reserve previously pointed out in a research report that official statistics may understate the actual extent of hedge fund participation in the Treasuries market, which means that the true level of risk may exceed the known figures.