The Hedge Fund House of Cards Propping Up U.S. Treasuries

Author: Chris Wood

This writer remains of the view that Treasury bonds are in a structural bear market and that equity investors should hedge their portfolios by betting on a pickup in bond “vol” as discussed here previously (see AI Stock Buyers Beware, 17 December 2025).

This is because a renewed uptick in Treasury bond yields in coming months is one obvious risk to US equities which continue to be driven by the AI capex trade after the sell-off triggered by the Iran War.

Nvidia and the four hyperscalers have risen by 27.2% from the recent low reached in late March, while the S&P500 is up 13.1% over the same period.

It is also the case that Nvidia and the four hyperscalers still account for an estimated 45% of the gains in the S&P500 since the start of 2023 when the AI capex arms race commenced.

Meanwhile, the market will start to focus on the likely arrival of Fed Chairman appointee Kevin Warsh at the US central bank.

Our Thoughts on Incoming Treasury Secretary Kevin Warsh

Warsh has continued to talk about balance sheet contraction, which is interesting since the Fed decided in December to resume balance sheet expansion again by initiating purchases of shorter-term Treasury securities (mainly Treasury bills) “for the sole purpose of maintaining an ample supply of reserves over time”.

It has since scheduled to purchase US$40bn of Treasury bills per month starting 12 December under the so-called “reserve management purchase” operation, though the pace has reduced to US$25bn in the month beginning 14 April.

This followed signs of emerging liquidity stresses in the repo market last October. In addition to such purchases, the Fed also reinvests all principal payments received from the Fed’s holding of agency securities into Treasury bills.

This amounts to around US$13.4-15.5bn per month. As a result, the Fed’s holdings of Treasury bills have risen by US$229.7bn from US$195.5bn on 10 December to US$425.2bn on 22 April.

The base case remains that Warsh will be quick to back off a balance sheet contraction strategy on any sign of renewed stresses in the repo market.

What Do the Cayman Island Have to do With Treasury Bonds?

In the subscriber-only analysis below we dig through the implications from a recent Federal Reserve Board report unmasking the hidden marginal buyer of US treasury bonds the last three years.

The buyer is not who we would have expected and has critical implications for what will happen to the US dollar, gold and bitcoin prices should treasury yields continue rising towards the all important 5% level.