You are here
Robert Lambourne: After hedge funds and Treasury's dealers, who's left to buy U.S. debt?
By Robert Lambourne
Saturday, March 22, 2025
The U.S. Treasuries market today is evoking a maxed-out credit card.
The end of “quantitative tightening” by the Federal Reserve seems imminent, apparently to be rapidly replaced by another round of “quantitative easing.”
Hedge funds have continued to be buyers of Treasuries and apparently have been incentivized to hold them. In particular as we covered in late 2023, some of these funds have been able to set up profitable and essentially risk-free basis trades by simultaneously holding Treasury bonds and a short position in Treasury futures to offset their exposure.
Both the Bank for International Settlements and the International Monetary Fund have issued reports on these hedge fund holdings, long and short, and the basis trades.
... Dispatch continues below ...
... ADVERTISEMENT ...
Bullion Star Opens in the U.S., Selling and Vaulting Gold and Silver
Bullion Star is now open in the United States, offering gold and silver bullion at extremely competitive prices with free delivery. Bullion Star also offers customers a year of free vault storage along with free delivery as well as storage in its secure precious metals vault in Dallas, Texas.
Storing precious metals is challenging. Homeowner's insurance seldom covers precious metals, and safe deposit boxes offered by banks are neither insured nor covered by the government deposit insurance. Bullion Star's vault is an independently run, Class III UL-rated vault with uncompromising surveillance and round-the-clock security.
With Bullion Star you can transact and store your metals securely and confidentially. Your bullion is fully insured against all risks at full replacement value. Bullion Star uses five audit methods to verify the existence and correctness of your stored bullion.
For more information, please visit:
Given the current chaos in U.S. capital markets, it seems hard to expect overseas investors to hold U.S. Treasuries other than short-term ones.
That hedge funds were recently reported by the International Monetary Fund to be holding 11% of Treasuries highlights how important hedge funds have become as investors. This raises suspicion that the hedge funds have been offered incentives to buy Treasuries and that they may be the buyers of last resort apart from the Federal Reserve.
Understanding this situation is important for investors in gold since it seems that a tipping point is near. Either the U.S. federal government debt is funded by way of "quantitative easing" or some sort of gold price reset is engineered to enable enough repayment of debt to return it to a more normal level.
Either course seems likely to result in much higher gold prices, and it is possible that prices could rise far higher than ordinarily might seem plausible. Years of official gold price suppression policy are behind this.
… Hedge fund buying in 2022 as QT commenced …
A GATA dispatch on October 22, 2023 –
https://www.gata.org/node/22873
-- considered whether the commencement of QT in June 2022 was driven by hedge funds using a basis trade whereby they acquired not only Treasuries but also equivalent short positions in them.
This chart –
https://www.gata.org/sites/default/files/Lambourne-Chart1A.pdf
-- is from that dispatch and tracked on a weekly basis the level of net short positions in U.S. Treasury futures (in blue) and the decline in the holdings of U.S. Treasuries held by the Federal Reserve from the peak holding on June 8, 2022 -- $5,771.4 billion (in green). The starting date for both lines is the week commencing March 20, 2022, when the Fed's assets were reported to be at the highest in total, at $9,012 billion on March 23, 2022.
Visually there appears to be a strong correlation between the two and suggests that hedge fund involvement was important to allow QT to proceed smoothly.
The dispatch concludes:
"The possibility that U.S. monetary authorities have tacitly engineered and supported a policy of encouraging what regulators, including the Fed itself, consider to be a risky trade, with hedge funds holding highly leveraged short positions in Treasury futures, is perhaps a reason to query whether U.S. Treasury bonds represent the safest investment category globally. The answer perhaps depends on whether the chart reveals a strange coincidence or is a sign of an effort to ease the passage of QT."
Another GATA dispatch on this topic was issued on December 23, 2023:
https://www.gata.org/node/22972
This dispatch considers the substantial profits made by the hedge funds as a reward for assisting QT and concludes:
"If, as seems very possible, the fantastic profits made by the hedge funds involved in the basis trade arose largely from explicit or tacit cooperation with the Federal Reserve or the Treasury Department or both to get QT done, the U.S. financial system and the government agencies running it would be rigging markets and corrupt and deceptive in still another way."
… More recent updates from the IMF on hedge fund buying of Treasuries …
The IMF Global Financial Stability report from April 2024 notes that hedge funds held more than 7% of outstanding Treasuries and that leveraged fund positions had been increased.
Two charts from the IMF report highlight the importance of hedge fund buying of Treasuries from Q3 2022 to Q4 2023, with hedge funds buying accounting for more than the total sales by the Federal Reserve --
https://www.gata.org/sites/default/files/Lambourne-Chart-1.pdf
-- and hedge fund ownership of the Treasuries market exceeding 7%:
https://www.gata.org/sites/default/files/Lambourne-Chart-2.pdf
The topic of basis trades was clearly of interest to the IMF, and its report notes that "Federal Reserve Board staff, using proprietary data sets, find that the volume of the basis trade is likely significantly lower than that implied by leveraged funds' Treasury futures positions alone, and estimate that hedge funds have increased basis trade activities by at least $317 billion since Q1 2022."
This appears to be a tepid point and it seems clear that hedge funds very much became the major buyer of Treasuries when QT was underway. So the suspicion remains that hedge funds were prepared to undertake these purchases because of the opportunity to engage in a profitable basis trade. Whether this trade was created for them remains an open question.
The next edition of the IMF Global Financial Report, issued in October 2024, has the following chart:
https://www.gata.org/sites/default/files/Lambourne-Chart-3.pdf
It highlights that hedge funds had risen to holding 11% of the Treasuries market and furthermore that primary dealers in Treasury securities were also holding a further 5% of the market. Hence, approximately one sixth of the Treasury securities that have been issued are owned by these two groups.
… Outlook for the Treasuries market …
This reliance on hedge funds and primary dealers seems to imply that the Fed and the Treasury Department have run out of new investor groups to buy Treasuries.
It is hard to envisage any increase in purchases by foreign investors, especially given the alarm over tariffs and the recently published document from the White House on inward investment –
https://www.whitehouse.gov/presidential-actions/2025/02/america-first-investment-policy/
-- which makes clear that investment from China is not welcome.
In this context last week's Federal Reserve meeting indicates that changes are coming. This report from Reuters sets out that QT seems to be shutting down and that QE, as far as the Treasuries market is concerned, may be about to restart:
https://www.reuters.com/markets/us/feds-says-will-slow-balance-sheet-runoff-process-2025-03-19/
Hence it seems that there is now a general recognition in the Fed and the Treasury Department that the only way to increase federal government borrowing henceforth is for the Fed to buy bonds.
So the time may have arrived for the authorities to consider whether a gold price reset is a better way forward.
For gold investors it seems that whatever path is chosen, gold is likely to rise in price.
The risks of gold confiscation need to be considered, along with whether there are multiple claims on gold held in exchange-traded funds and other funds. These risks argue for a cautious approach to investment in gold, with a clear preference for holding actual metal.
Also needing to be considered is the possibility that China -- which appears to be in a depression, weighed down by high debt, especially in the property sector -- may decide to reset the gold price. China might act without warning as a counter to what its leadership sees as hostile acts from abroad.
----
Robert Lambourne is a retired business executive in the United Kingdom who consults for GATA about the involvement of the Bank for International Settlements in the gold market and about U.S. government debt.
* * *
Support GATA by purchasing
Stuart Englert's "Rigged"
"Rigged" is a concise explanation of government's currency market rigging policy and extensively credits GATA's work exposing it. Ten percent of sales proceeds are contributed to GATA. Buy a copy for $14.99 through Amazon:
* * *
Help keep GATA going:
GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at:
To contribute to GATA, please visit:
Donations of $250 will entitle the donor to a 1-ounce silver round commemorating GATA's work:
https://www.gata.org/sites/default/files/GATA-silver-round-front.png
| Attachment | Size |
|---|---|
 Lambourne-Chart-1.pdf | 36.3 KB |
| Lambourne-Chart-2.pdf | 41.84 KB |
| Lambourne-Chart-3.pdf | 44.31 KB |
