Hedge funds hold $1.2 trillion Treasury trade financed through daily repo borrowing.

Hedge funds have built one of the largest leveraged bets in the US Treasury market, and the financing behind it must be renewed almost every single day it stays open. Morgan Stanley’s latest estimate puts the trade at roughly $1.2 trillion, down sharply this year, even as separate government research shows hedge funds’ total Treasury holdings reached a record $2 trillion.

• Morgan Stanley estimated the Treasury cash-futures basis trade fell 20% this year to about $1.2 trillion, per September 24 reports.
• Federal Reserve researchers estimated $830 billion in basis positions for September 2025, using a different methodology.

• $1.2T Morgan Stanley’s basis-trade estimate, down 20% so far this year
• $2T hedge funds’ cash Treasury holdings at year-end 2025, nearly 3x 2020’s level
• 7% hedge funds’ record share of the $28.9T Treasury market
• $830B Fed’s September 2025 basis-trade estimate, built on a different model

Hedge funds have reemerged as among the largest buyers of US government debt, but much of that buying runs on loans that must be rolled over constantly to stay in place, according to CryptoSlate reported. The strategy, known as the Treasury cash-futures basis trade, pairs a long Treasury position with a short futures contract to capture a thin, largely market-neutral pricing gap. Because that gap is small, funds borrow most of the purchase price through overnight repo financing, an arrangement that has to be replaced every day the trade stays open.

Morgan Stanley’s $1.2 trillion figure comes with no sign of stress yet

Morgan Stanley’s September 24 estimate placed outstanding basis-trade positions at about $1.2 trillion, down 20% from earlier levels this year. The bank reported no evidence of broad market stress tied to the trade as of that date, meaning the contraction looks more like funds quietly letting positions expire than a disorderly rush for the exits.

That distinction matters because the two outcomes look identical in the headline number but very different underneath.

CryptoSlate’s account illustrates the arithmetic with a simple example: a $100 million position earning 0.2% annually nets $200,000, a 4% return if the fund has committed only $5 million of its own capital. But if financing costs on the remaining $95 million rise by just 0.2% over the year, the extra bill is $190,000, wiping out nearly the entire expected profit without the government missing a single payment.

OFR data show hedge funds’ cash Treasury holdings tripled in five years

The Office of Financial Research found hedge funds held $2 trillion in cash Treasuries at year-end 2025, nearly three times the level five years earlier. Over the same period, total marketable Treasury debt outstanding rose 29% to $28.9 trillion, meaning hedge funds’ share of the market grew even faster than the debt itself, reaching a record 7%.

Hedge funds’ short futures positions totaled $1.4 trillion over the same period, the OFR found.

The OFR attributes the growth partly to constraints on primary dealers, whose balance-sheet capacity has been limited since post-2007-09 financial crisis capital rules. At the same time, mutual funds, separately managed accounts and insurers have shifted toward Treasury futures rather than cash bonds for duration exposure, and hedge funds have often taken the opposite side of those futures positions, a mirror-image relationship the OFR documents directly.

Fed’s $830 billion number is not a prior reading of Morgan Stanley’s figure

A Federal Reserve note published this June estimated $830 billion in basis positions for September 2025, using a different approach than Morgan Stanley’s. Other research from the CFTC, the Bank for International Settlements and sell-side firms has put the trade’s size anywhere from $350 billion to $1.5 trillion, underscoring how sensitive these estimates are to methodology rather than a single agreed figure.

Treating the Fed’s $830 billion and Morgan Stanley’s $1.2 trillion as sequential readings of the same shrinking trade would manufacture a trend the data does not support.

The mechanics explain why forced unwinds, if they happen, could move faster than a simple expiration of loans. If a repo lender’s haircut rises from 2% to 4%, a fund must supply twice as much of its own capital against the same collateral, even before accounting for futures margin calls triggered by price swings between the bond and the short futures position.

The BlockWest read. The real signal for allocators is not the $1.2 trillion headline but who replaces this demand if funds keep letting positions lapse. Asset managers buying with committed capital rather than overnight repo would make the market steadier, but they will likely demand higher yields for the income exposure, raising Washington’s borrowing costs even if nothing breaks. Watch primary dealers’ balance-sheet capacity and repo haircuts, not the position total alone.

Treasury futures contracts next expire in December, the quarterly window when asset managers roll long positions and hedge funds typically find fresh basis-trade opportunity on the other side. Whether repo haircuts and futures margin costs stay stable into that roll, rather than the $1.2 trillion figure itself, will determine if this remains an orderly contraction or becomes a forced one.

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