New York Fed probes risks as hedge funds fill void left by pension funds in Treasurys

The world’s most important bond market just underwent a quiet ownership change, and the Federal Reserve Bank of New York wants to know what it means. Hedge funds have amassed roughly $2 trillion in US Treasury holdings, a record that represents nearly 7% of the entire market, stepping into a gap left by pension funds that have been steadily retreating from government debt for years. The New York Fed is now actively examining the strategies hedge funds are deploying, particularly in relative-value trading. The core concern is straightforward: the buyers who replaced pension funds operate with fundamentally different risk profiles, time horizons, and leverage levels. The great rotation out of bonds Pension funds used to be one of the most reliable sources of demand for US Treasurys. Their fixed-income allocations historically hovered near 40%, which made sense for institutions with long-dated liabilities and a mandate to prioritize stability over eye-popping returns. That allocation has since dropped to somewhere between 10% and 15%. The reason is the familiar story of the post-financial-crisis era: years of low bond yields pushed pension managers toward alternative investments, from...