Changes in the U.S. Treasury Market Structure Raise Concerns Over Fiscal Deficit Shock

In the U.S. Treasury market, the share of hedge funds is increasing, raising the possibility of intervention by the Federal Reserve. The Wall Street Journal (WSJ) reported that while the Treasury market appears stable, it has become vulnerable to shocks due to changes in investor composition and funding structures. The U.S. government issues approximately $2 trillion in additional Treasury bonds each year, which is increasing the structural risks in the market. The proportion of price-insensitive investors, which was 75% in 2007, has now decreased to 52%, while hedge fund holdings of Treasury bonds have reached an all-time high. Hedge funds primarily purchase Treasury bonds through short-term borrowing in the repo market, which could trigger large-scale sell-offs during financial market stress. Additionally, the share of short-term Treasury bonds has increased from 15% in 2019 to 22% currently, and it is projected to reach 25% by 2028. This could destabilize the government's borrowing costs.

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