Hedge Fund Leverage in US Treasuries Risks Forced Liquidation as Global Rates Rise
Hedge funds have built large leveraged positions in US Treasuries, funded primarily by borrowing rather than new capital. As global bond yields climb, the value of tens of trillions of dollars in fixed-rate debt has fallen, with the US Treasury market most affected. The 2026 debate over 'China Shock 2.0' highlights persistent US twin deficits, now driven more by private financial actors.
Hedge funds have continued to accumulate exposure in the US Treasury market, but these positions are not supported by new capital from the funds themselves; instead, they rely mainly on borrowed financing. With global bond yields in an upward cycle, the trading prices of tens of trillions of dollars in fixed-rate debt have declined, while yields have risen in tandem. Among these, the US Treasury market—the largest of its kind—has been hit particularly hard.
In the summer of 2026, discussions around 'China Shock 2.0' once again drew attention to the coexistence of China's massive trade surplus and the United States' massive trade deficit. This means the US remains in a 'twin deficit' position, with both a government budget deficit and a current account deficit. Compared with the past, the current twin-deficit configuration has changed markedly, with private financial actors playing a more prominent role.