Who is taking over the US debt?

Hedge funds have quietly become the largest foreign holders of U.S. Treasury bonds, with their holdings even surpassing China, Japan, and the United Kingdom. This arrangement has become even more critical amid the outbreak of the Iran war and the pullback of traditional overseas buyers, but it also carries vulnerabilities due to its heavy reliance on purely financial logic.

Since the outbreak of the Iran war, the yield on the 10-year U.S. Treasury has at times jumped by nearly 50 basis points, with multiple Treasury auctions performing weakly, and concerns in the market about non-U.S. governments selling Treasuries continuing to mount.

According to Federal Reserve custody data, since the war broke out, foreign central banks have sold a total of $82 billion in U.S. Treasuries, bringing their holdings down to the lowest level since 2012 at $2.7 trillion.

However, the buyers that are truly worth watching are not central banks, but hedge funds registered in the Cayman Islands. By the end of 2025, hedge funds’ long positions in U.S. Treasuries will reach $2.4 trillion—nearly triple compared with three years ago. Federal Reserve economists believe this figure is still underestimated by $1.4 trillion.

However, hedge fund holdings are based solely on arbitrage logic. If interest rate trends or market conditions turn unfavorable, a large amount of capital could close out and flee in sync, triggering financial stability risks.

Central bank sales of $82 billion have had limited impact

After the outbreak of the Iran war, actions by foreign central banks selling Treasuries drew widespread market attention.

According to Federal Reserve custody data, non-U.S. central banks have sold a total of $82 billion in Treasuries, reducing outstanding holdings to $2.7 trillion, the lowest level since 2012.

However, this scale of selling still remains limited within the overall landscape. $82 billion is small relative to the total outstanding stock of U.S. Treasuries, and there are some discrepancies between this data and the more authoritative TIC data on cross-border capital flows.

More importantly, central banks selling Treasuries are more likely driven by defensive considerations—stockpiling foreign-exchange “ammunition” during turbulent times—rather than anti-American sentiment; Poland’s recent sale of gold follows a similar logic.

Hedge funds quietly become the largest foreign holders

Research from the Federal Reserve Bank of New York shows that since 2018, leveraged hedge funds have significantly increased their holdings of Treasuries. According to data from the U.S. Financial Research Office, by the end of 2025, hedge funds will hold $2.4 trillion in long positions and $1.6 trillion in short positions, nearly triple compared with three years ago.

This expansion is mainly driven by two types of trades: “basis trades” that exploit arbitrage opportunities between futures and spot prices, and “swap” trades whose scale has ballooned sharply in recent times.

More strikingly, Federal Reserve economists believe that official TIC data underestimates hedge funds’ cross-border holdings by as much as $1.4 trillion. Based on this adjustment, the Cayman Islands is actually the largest foreign holder of U.S. Treasuries, with holdings significantly exceeding those of China, Japan, and the United Kingdom.

Federal Reserve economists further point out that between 2022 and 2024, hedge funds “absorbed 37% of the net issuance of U.S. medium- and long-term Treasuries—almost equal to the total of all other foreign investors.”

The dual role of hedge funds: stabilizers or a source of risk

Industry insiders such as Ken Griffin, founder of Citadel, believe that hedge funds’ participation provides beneficial liquidity support to the market. During the Federal Reserve’s tapering of quantitative easing, their buying effectively buffered pressure on the bond market;

However, hedge fund holdings are based solely on arbitrage logic. If interest rate trends or market conditions turn unfavorable, a large amount of capital could close out and flee in sync, triggering financial stability risks.

It is reported that at the beginning of the Iran war outbreak, some crowded hedge fund positions were “cleansed,” but the situation has not deteriorated further at present. Long-term asset holders such as insurance companies have also not shown any significant signs of exiting, and the market remains relatively stable.

No matter how the market responds today, U.S. Treasury Secretary Scott Bessent’s refinancing pressure cannot be ignored. Next year, about 33% of U.S. debt will mature, requiring the rolling issuance of roughly $10 trillion in new debt.