Where it is: Investors who buy U.S. government bonds are different now. The share of hedge fund buyers, using borrowed money, has increased as foreign central banks have withdrawn.
The last one: The share of U.S. Treasury securities held by foreign official entities such as central banks, finance ministries and sovereign wealth funds fell to 11.8% in August, according to data released Friday by the Treasury Department.
- This is down from 40% during the financial crisis.
- Hedge funds and other investors appear to have filled this void. The share of Treasury securities held by hedge funds rose to 33.5%, up from about 10% over that period, according to a data analysis by Adam Josephson, founder of Sakonnet Research.
Please note: It uses a commonly understood proxy to obtain this hedge fund data: financial centers’ share of foreign Treasuries in six countries, including the Cayman Islands and Belgium. These are countries where hedge funds will typically domicile their money, and it also includes other types of private financial actors.
The plot: While foreign governments are less price sensitive and more likely to buy Treasuries and relax, hedge funds trade more actively and use leverage to do so – that’s a recipe for volatility.
- At the same time, the U.S. government is issuing more and more debt.
- “There’s always more supply, and someone has to step in to absorb it and that person is increasingly price sensitive and highly leveraged,” Josephson says. “It is completely natural to see greater volatility.”
Catch up quickly: The week began with the 10-year Treasury yield at 5.23% – a level last seen in the run-up to the financial crisis.
- A hot CPI report on Wednesday briefly pushed the 10-year yield up more than 5.3% before falling back to around 5.08% on Friday. (Remember, when it comes to Treasury securities, small moves mean big things.)
- This is the largest weekly decline since April 2025, notes Jim Reid of Deutsche Bank this morning (i.e. around Liberation Day).
What’s weird is that yields fell even though the market saw two different inflation reports showing rising prices. Typically, this would mean yields would rise as investors adjust to higher inflation expectations.
- Wall Street analysts said it was a flight to safety as the AI trade faltered – chip stocks were down for the week – and investors decided to buy less risky Treasury notes and bonds.
- This increased demand has pushed up prices, which move inversely to yields.
Yes, but: This is a huge market, and no one knows for sure what happened.
Between the lines: Greater volatility in the U.S. bond market could translate into higher returns in the long run, Josephson says.
- That would mean higher borrowing costs for Americans taking out loans to buy a home or car.
- And for the American government itself. And it could get hairy.
Concrete example: The federal government paid $1.052 billion in interest on its debt for fiscal year 2026, according to the Treasury Department.
- It is the nation’s third-largest expenditure after Social Security ($1.67 trillion) and Medicare ($1.07 trillion).
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