Since the first quarter of 2000, the pile of marketable Treasury notes and bonds has swelled by roughly a factor of nine through 2025. Over that same span, foreign reserve manager assets expanded about sevenfold, while the combined assets of U.S. insurers, pension funds, mutual funds and ETFs increased to around four times their 2000 level. That mismatch between supply and the balance sheets of traditional buyers created space for a new marginal source of demand. Similar pressures on repo demand also arise when foreign buyers of Treasuries hedge their currency risk.
Hedge funds stepped in. By late 2025, their long Treasury positions had expanded to $2.4 trillion from around $600 billion in 2014. Research finds they have increasingly acted as the marginal buyer, including around periods when the Fed is adding to or trimming its own Treasury holdings.
Two strategies explain much of that growth. The cash futures basis trade has evolved from a niche idea into the main driver of hedge fund Treasury holdings. It pairs a short in a Treasury futures contract with a long position in the corresponding cash security, essentially a view that cash bonds are cheap to futures. Estimates suggest this trade accounts for roughly 60 percent of the recent increase in hedge fund Treasury positions.
A related strategy - the swap spread trade - has also gained traction in 2024 and 2025. Here, a fund pays fixed and receives floating in an interest rate swap while buying a cash Treasury of a similar maturity, again leaning into the view that the bond is undervalued relative to the derivative.
These trades share a critical feature. The long cash bond is financed in repo, while the short leg sits in derivatives. That mix creates a sizable net funding need that lands on dealers.
Dealers, in turn, must raise funding by tapping money market funds and other sources of short-term cash, a process that is costly in balance-sheet terms and limited by their lending capacity. As that levered demand builds, secured funding rates tend to run above administered policy rates to compensate for those constraints.
Because the trades are collateralized, the funding pressure shows up most in repo. It does not fully flow through to the federal funds rate. The upshot during periods when leveraged activity expands is a wider gap between secured and unsecured rates.
By year-end 2025, hedge funds owed about $1.8 trillion net in repo, an amount equal to roughly 6 percent of the outstanding stock of marketable Treasury notes and bonds. That figure more than doubled from early 2024. The initial surge occurred alongside a boom in basis strategies during 2023 and 2024. In the period that followed, hedge funds' net borrowing in repo kept rising even though short Treasury futures positions were roughly unchanged; observers also reported more chatter about the swap spread trade in the run-up to April 2025.
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Researchers find that when net funding demand from these trades picks up - tracked using quarterly figures on hedge funds' net repo and weekly data on leveraged short positions in Treasury futures - secured rates tend to rise further above the administered settings and above the federal funds rate, even after accounting for reserve levels. Their estimates suggest that the expansion of these leveraged relative-value strategies over the past decade has been linked to roughly 10 to 20 basis points of widening in repo market spreads. They also flag that pinning down causality is hard, since appetite for the basis trade is influenced by other forces like asset manager demand and the overall supply of Treasuries. The growing divergence between secured and unsecured benchmarks is increasingly relevant for the choice of operating target discussed by policymakers in 2025.
If repo cash were limitless, this would be a non-story. It is not. Dealers face balance sheet limits and typically run close to matched books.
Evidence shows that, on average, about 85 cents of every dollar of dealer repo borrowing is offset by a reverse repo position. That setup means dealers do not absorb the hedge funds' demand themselves. They pass it through to the ultimate cash providers.
Not every hedge fund trade produces net funding pressure. Cash-neutral relative value trades pair a long cash Treasury with a short in another cash Treasury and are often delivered as netted packages where cash never moves, so they generate little net demand for funds and should not shift money market spreads. It is the net-funding-demand strategies - the cash futures basis and swap spread trades - that create the repo borrowing that pushes secured rates up relative to administered benchmarks.
For savers and short duration investors, the takeaway is simple. A growing slice of Treasury demand now comes from leveraged trades that lean on repo. When that demand swells, secured funding rates tend to drift above policy rates and further away from unsecured benchmarks like fed funds. If Treasury issuance keeps outpacing the growth of traditional real-money accounts, these dynamics will stay in the foreground of cash markets, shaping yields on instruments you actually hold - from government money funds to short Treasury ETFs to floating rate notes.
