Source: Federal Reserve Bank of New York, Liberty Street Economics, September 28th, 20261
The RBA puts the same borrowing at over US$3 trillion, close to 10% of US GDP2.
On October 1st, 2026 the Reserve Bank of Australia (RBA), the country's central bank, named borrowed money in overseas government bond markets as a rising threat3,4. Its twice-yearly Financial Stability Review says price-sensitive investors again account for a large share of trading, as central bank purchases have abated4. Some of them, including hedge funds (private investment funds that face few limits on borrowing), borrow heavily to profit from small price gaps4.
The borrowing is large and has doubled in two years. Hedge funds borrowed about $3 trillion in US repo markets by late 2025, against $1.5 trillion in 2023, according to the Federal Reserve Bank of New York1. The RBA puts the figure at close to 10% of US GDP2. In the UK, a small number of hedge funds account for more than 90% of net borrowing against government bonds, per the Bank of England5.
The RBA names a trigger and says the stress has not arrived. A shift in sentiment towards the AI investment boom is one possible trigger for a sharp repricing, it says, and the rise in government bond yields has been orderly so far4. Two recent bond market breaks, in March 2020 and September 2022, eased only after central banks bought bonds in size6,7. For investors, the question is who would be forced to sell government bonds if yields jumped, not only which governments borrow too much.
The Financial Stability Review is the RBA's twice-yearly assessment of the health of Australia's financial system and the risks to it3. The October 2026 edition finds Australian households, businesses and banks broadly resilient, and says the principal risks are increasingly coming from abroad4.
Government bond markets feature prominently among those risks. Sovereign debt in some large economies is trending higher from already elevated levels4. The RBA says it is closely monitoring the growing role in these markets of investors who borrow heavily or trade on price4. It also notes that several large advanced economies lack credible medium-term fiscal frameworks, and that markets have not yet focused on this4.
Some, including hedge funds, are using significant amounts of leverage in these markets to profit from small arbitrage opportunities.
Central banks are buying fewer government bonds, so buyers who care about price fill the gap4. Some of those buyers borrow heavily against the bonds they hold2. If they are forced to sell at once, the RBA says, that could bring increased volatility and potentially a disruptive selloff in core bond markets4.
The RBA's main finding is a vulnerability, not a forecast. It says the upward move in sovereign bond yields has generally been orderly to date4.
AustraliaPublished the October 2026 Financial Stability Review on October 1st, naming borrowed money in sovereign bond markets and AI-related debt as key external threats3,4.
United Kingdom
United States
GlobalIts October 2026 Global Financial Stability Report warns of a sharper rise in sovereign bond yields and of trades in bond markets funded with borrowed money11. It asks countries to better monitor hedge fund borrowing12.
The best known of these positions is the cash-futures basis trade. A hedge fund buys a government bond and at the same time sells a futures contract on it, profiting from a small price difference between the two8. That is how the Office of Financial Research (OFR), a research office of the US Treasury Department, describes it8. Because the profit is small, funds scale up by borrowing heavily8.
In calm times, hedge funds use borrowed money in so-called basis trades, seeking to profit from small price differences between Treasury securities and related derivatives.
International Monetary Fund12
The borrowing runs mostly through repo. A repurchase agreement, or repo, is a sale of a security for cash with a promise to buy it back at a set price on a later date1. In effect it is a short loan with the bond as collateral. US repo agreements outstanding are around $13.5 trillion on a given day, and hedge funds are the largest cash borrowers in the private market1.
The trade is fragile because hedge funds typically borrow with zero or near-zero haircuts, meaning they post little or no collateral beyond the bond itself2. They also tend to borrow overnight, because it is cheaper than longer-term financing8. If repo rates spike or futures margins rise abruptly, funds may have to unwind quickly, which could amplify volatility8.
Notional value, US$ billion
Source: Office of Financial Research, August 19th, 20268
Approximate levels, as the OFR describes its own chart. Hedge funds are typically on the other side of asset managers' demand for futures.
The OFR estimates hedge funds' short futures positions at $1.4 trillion and says a significant share is likely the basis trade8. Published estimates of the trade's size range from $350 billion to $1.5 trillion8.
By the end of 2025 hedge funds held about $2 trillion of US Treasury securities, a record 7% of the market, according to the OFR8. Total marketable Treasury debt rose 29% to $28.9 trillion over the same five years, far slower than hedge fund holdings8. Gross hedge fund assets reached $13 trillion, the International Monetary Fund (IMF) says12.
The OFR links the shift to bank rules adopted after the 2007 to 2009 crisis, which limit how many Treasuries the large dealer banks can hold8. Hedge funds face no such limits, so they absorb issuance the dealers cannot8. The IMF adds that, as central banks shrink their balance sheets, greater reliance on price-sensitive investors could add to yield swings11.
The pattern is not only American. The Bank of England reported hedge fund borrowing in the UK gilt repo market at close to 100 billion pounds in November 20255. A small number of funds accounted for more than 90% of net borrowing, often at very short maturities that need regular refinancing5.
The Federal Reserve's May 2026 report found hedge fund borrowing, relative to assets, stable at record-high levels10. It said the basis trade had shrunk, but other relative value trades, such as swap spread trades, largely offset the decline10.
For about two weeks in mid-March 2020, government bonds sometimes sold off when they would normally attract safe-haven buyers13. That is the finding of the Bank for International Settlements (BIS), which serves the world's central banks13.
Evidence in the US Treasury market points to forced selling of treasury securities by investors who had attempted to exploit small yield differences through the use of leverage.
Bank for International Settlements13
On March 15th, 2020 the Fed's monetary policy committee said it would raise its holdings of Treasury securities by at least $500 billion, to support markets that are central to the flow of credit6. A later conference paper counts about $1.6 trillion of Treasury purchases between early March and the end of May, with $362 billion in a single week from March 25th to April 1st14.
Fed staff wrote in 2023 that hedge funds unwinding the basis trade likely contributed to the March 2020 instability, while noting that the size of that contribution is still debated15.
On September 23rd, 2022 the UK government announced a set of fiscal measures, and gilt yields rose sharply in the days that followed9. Between August 1st and their peak on October 14th, yields on 30-year gilts rose more than 270 basis points and briefly exceeded 5%9.
Basis points
Source: Bank of England, December 13th, 20229
The gilt figure is the Bank of England's 'more than 270'; the US and German figures are its 'around 150'.
The stress ran through liability-driven investment (LDI) funds, which UK pension schemes use to hedge their liabilities9. Rising yields drained their buffers, and their selling pushed yields higher still9. From September 28th the Bank of England carried out temporary purchases of long-dated gilts, on whatever scale was necessary to restore orderly conditions7.
The episode involved pension funds rather than hedge funds, and the Bank later found that LDI buffers had been too low9. The lesson the RBA draws covers both: when borrowed positions are concentrated, a fast move in yields can force sales that feed on themselves2.
The RBA says part of the rise in bond yields comes from competition for debt funding from AI-related corporate bond issuance4. In the United States, investment-grade bond issuance in the year to August 2026 was around 50% higher than a year earlier, driven in part by borrowing from the AI industry2.
It also names a shift in sentiment towards the AI investment boom as one possible trigger for a disorderly repricing4. It describes that boom as increasingly fuelled by a debt-financing cycle that is becoming more opaque and circular4. The IMF reviewed 14 such deals since 2023 and found about $300 billion of equity and $650 billion of debt, in exchange for $1.4 trillion of future revenue commitments11.
The mechanism has already shown up in stocks. In July, the US hedge fund Situational Awareness was forced to unwind borrowed AI positions to meet margin calls, and the RBA says the fire sales were reported to add to losses elsewhere2. The RBA's concern is that a similar forced sale could spread from equities into bonds, particularly where investors have borrowed to boost returns4.
The IMF says basis trades help align prices and support market liquidity in calm times12. The OFR says hedge fund borrowing lets the market absorb Treasury issuance that constrained dealers cannot8. The RBA itself says these arrangements support liquidity in normal conditions2.
Recent trading also cuts against the RBA's trigger. When concerns about leading AI firms grew in mid-October, US 10-year yields fell about 17 basis points in a week while the Nasdaq 100 stock index dropped 5.5%, Bloomberg reported16. Treasuries acted as a haven, which is the opposite of a disorderly bond selloff.
Our reply is that both points hold until funding tightens. In March 2020 Treasuries sometimes sold off when they would normally attract safe-haven buyers, because investors using borrowed money were forced to sell13. The haven behaviour so far tells us demand for safety is intact. It does not test what happens if repo rates jump or margins rise, which is the scenario the RBA describes2,8.
A second objection is that central banks have shown they will step in, so the risk is contained. The RBA notes that central bank facilities or interventions appeared to contain this risk in April 2025 and in 20222. That makes the risk smaller, not absent, and it shifts the cost to central bank balance sheets.
Confidence on the mechanism: high. Four official bodies, in Australia, the United States, the United Kingdom and at the IMF, describe the same chain: heavy borrowing on thin collateral, short funding, and forced sales when funding costs jump2,8,5,12. Two recent episodes show it in action13,9.
Confidence on timing: low. The RBA says the rise in yields has been orderly4, and the Fed found hedge fund borrowing stable rather than rising in its May 2026 report10. The AI stock selloff in mid-October lowered yields16. We see no sourced sign of funding stress in repo markets today.
Where we differ from much of the coverage. Rising yields are usually discussed as a story about government budgets in France or the United States. We think the more useful question for investors is who would be forced to sell if yields jumped, and how fast. On the official data, that answer now includes a small number of heavily borrowed hedge funds5,1.
What would change our view. We would raise the timing risk on a jump in overnight repo rates, a sharp rise in futures margins, or an official report of basis trades unwinding. We would lower it if regulators adopt minimum haircuts on government bond repo, as the IMF suggests12, or if hedge fund repo borrowing falls.
| Reader | Exposure | What to do now |
|---|---|---|
| Pension funds and insurers | Long-dated government bonds and derivatives hedges | Test liquidity buffers against a yield move of the 2022 gilt size, more than 270 basis points on 30-year debt9 |
| Private equity (PE) and venture capital (VC) firms | Portfolio companies refinancing in bond and loan markets | Plan refinancing on the assumption that a bond market disruption would tighten funding conditions in Australia too, as the RBA expects4 |
| Family offices and allocators | Treasuries and gilts held as the safe part of a portfolio | Do not assume government bonds always rise in a stock selloff: in March 2020 they sometimes fell with it13 |
| Corporate treasurers | Short-term funding and bond issuance plans | Note that AI-related issuance is competing for the same investors, per the RBA4, and keep some funding committed rather than rolled overnight |
| Banks and prime brokers | Repo lending to hedge funds | Review haircuts and concentration, since losses at hedge funds can weigh on the banks that fund them, per the IMF12 |