The structure of US Treasury buyers is changing! "Fast money" investors are gaining more influence, and the US government's financing costs face greater pressure.

Notice that, trapped by a selloff in US Treasuries that has pushed benchmark yields to multi-decade highs, the US government is finding itself increasingly reliant on investors who will only buy if the price is right. The makeup of the dominant players in the world's largest bond market is evolvingover the past two decades, driven by massive borrowing by the US federal government, the market has swelled sevenfold to $32 trillion. What has become relatively less important than before are foreign governments, central banks and pension funds. These buyers are less "knee-jerk" in their response to prices and have historically absorbed large amounts of what are traditionally considered risk-free securities. Although some of these institutions intend to reduce their holdings, they typically hold Treasuries for the long term. Call them "slow money." Central banks leave room for more "fast money" buyers At the same time, the footprint of private investors is expanding. They hold about 70% of federal debt, close to the highest level since 1990. And nearly one-tenth of the Treasury market belongs to hedge fundswhich have other assets to choose from, and whose leveraged approach to exploiting market dislocations has drawn regulators' attention to financial stability risks. In pursuit of returns, these investors will turn and leave at the slightest sign of trouble. They are "fast money." For the likes of US Treasury Secretary Bessent and Federal Reserve Chair Kevin Warsh, the concern is that these price-sensitive buyers, once they suddenly take fright at monetary policy, the economic outlook, the widening US deficit or any presidential executive order, will wield more influence than ever before. Admittedly, the US government can still find creditors to finance its spending, but these investors are less reliableand their capriciousness is helping push yields higher. In the view of Anshul Pradhan, head of US rates strategy at Barclays, this behavior reveals the true cost of US funding. "The investor base has become more discriminating," he said. "A market with a large number of price-insensitive buyers can absorb supply with relatively small adjustments; a market that relies on private capital may need to make larger concessions." Against the backdrop of this year's bond market selloff, the significance of this shift is even greater. Although this repricing was mainly driven by global factors, such as soaring oil prices and an improved growth outlook, it has rekindled concerns about US fiscal policy and also pushed up borrowing costs for companies and individuals. US Treasury yields hit a near-25-year high An Australian state-level fund said last year that it was reducing its Treasury holdings out of concern over US President Trump's tariff and tax plans. And in September this year, Norges Bank Investment Management, a unit of Norway's central bank, proposed cutting its sovereign bond holdings, saying other fixed-income assets offer better risk-adjusted returns. Meanwhile, companies are issuing debt at a record pace to finance the development of artificial intelligence and its supporting infrastructure, a bet that has fueled stock market fervor. Unlike foreign central banks (which usually buy Treasuries to manage national reserves and exchange rates), private investors are more inclined to sell Treasuries and switch to corporate bonds or stocks. At the same time, the Federal Reserve is no longer continuously buying bonds as part of quantitative easing programs aimed at boosting the economy. Paul Donovan, chief economist at UBS Global Wealth Management, said, "As investors, central bank officials are less volatile, partly because the range of assets they can buy is more restricted." "The capricious, less constrained private sector has expanded its influence in the bond market." The retreat of central banksoften seen as among the least price-sensitive buyershas made room for depository institutions, hedge funds and other relatively more price-sensitive investors. Bloomberg Economics estimates that the decline in Fed and foreign official holdings at one point added about 105 basis points to the term premiumthe extra return investors demand for the risk of holding a 10-year Treasury (rather than rolling over short-term securities over the same period). Another key source of long-term bond demand may be fading: corporate pension fund managers now have enough money on hand to pay retirees and have often closed to new members. According to the Milliman 100 Pension Funding Index, as of September, corporate pensions overall had about 114% of the required funding; in July 2020, these accounts were only 82% funded. As they profit in the stock market, they have an incentive to limit risk by shifting into bondswhose expected income can closely match their future liabilities to retirees. Many US pension funds are now fully funded Jason Williams, a rates strategist at Citigroup, said weakening pension fund demand could prompt the US Treasury to cut long-term bond issuance and increase short-term bill issuance instead. Stephen Douglas, chief economist at NISA Investment Advisors, said, "The trend for corporate defined-benefit pensions has been to freeze or close," "As a result, you are no longer accumulating new liabilities in the distant future." Fed researchers have noted the rise in hedge fund Treasury holdings: between 2012 and 2025, these funds quadrupled their holdings, accounting for nearly one-fifth of their assets. They have absorbed Treasuries faster than other US creditors, and by the end of last year, hedge funds held about 8.5% (about $2.7 trillion) of outstanding Treasuries. Hedge funds' share of the Treasury market is growing Given that hedge funds can act quickly, leverage their trades and sell Treasuries flexibly, this figure is particularly striking. Some hedge fund trades exploit relative value between comparable interest rates in the market. Typical examples include "basis trades" and "swap spreads." Macro hedge funds also bet on the direction of yields. Hedge funds play the role of intermediaries in the complex Treasury ecosystem Steven Blitz, managing director at TS Lombard, said, "Leveraged buyers boost demand and keep yields from rising too high," referring to these funds' activity in swap spreads and basis trades. But "once repo rates jump sharply, these positions will be unwound, triggering a flood of Treasury selling." To illustrate the potential threat of hedge fund holdings, market participants, regulators and the Fed all point to March 2020when, on the eve of pandemic lockdowns, investors rushed to sell bonds for cash. That selloff hit hedge funds' basis trade positions and exacerbated market volatility. But in recent months, the size of this trade has been shrinking, suggesting that this leveraged strategy is not currently a concern. The basis trade collapsed in March 2020 Nevertheless, the trade still highlights the divide between "fast money" strategies and those of major central banks such as the Fedespecially as price-sensitive investors account for a growing share of the market. A TS Lombard team led by Alexandros Xenofontos wrote, "The global bond market is adapting to a less forgiving buyer base," "Governments will still finance themselves, but increasingly at prices set by more discretionary investors."