14 trillion "hidden debts" come to light: How did Cayman hedge funds become the "invisible crocodiles" in the U.S. bond market?

The Federal Reserve's latest report reveals the data fog surrounding the U.S. Treasury market: the U.S. Department of the Treasury's International Capital data (TIC) not only "seriously" underestimates the debt holdings of hedge funds in the Cayman Islands but also overlooks their deep reliance on high-risk basis trading, and this blind spot harbors potential instability in the financial markets.

1. Data Gap: 14 trillion in debt scale is "invisible".

The Federal Reserve team noted in the report that as of the end of 2024, the TIC data underestimates the amount of U.S. Treasury bonds held by hedge funds in the Cayman Islands by approximately $1.4 trillion. After adjustments, the actual debt holdings of these funds reach as high as $1.85 trillion—this figure far exceeds those of traditional holding countries such as China, Japan, and the United Kingdom, making them the "largest foreign holders" of U.S. Treasury bonds.

What is even more noteworthy is that the debt holdings of hedge funds in the Cayman Islands have surged by $1 trillion since 2022, gradually becoming the "marginal foreign buyers" of U.S. Treasury bonds. The authors of the Federal Reserve report candidly state that this serious underestimation of data has become a "major obstacle" for policymakers and investors analyzing cross-border capital flows and their impact on financial markets.

2. Risk Blind Spots: The Dominance of Basis Trading Has Not Been Captured

The defects of TIC data are not limited to the statistics of debt holdings, nor do they reflect the core role of Cayman Islands hedge funds in basis trading. This strategy of arbitraging the price differences between government bond futures and spot prices requires leveraged operations through borrowing in the repurchase market—simultaneously buying government bonds in the spot market and selling government bond futures, relying on leverage to amplify the thin profit margins.

In fact, the risks associated with this type of trading have long raised regulatory concerns. In March 2020, basis trading liquidations were accused of triggering turmoil in the treasury market; in 2023, as hedge funds' leverage dependence increased, the Federal Reserve and the Treasury Department initiated risk reviews again; during the market fluctuations in April 2025, basis trading liquidations even contributed to 30% to 40% of the upward movement in U.S. Treasury yields. The nearly $1.4 trillion gap between TIC data and reports from the U.S. Securities and Exchange Commission is a direct reflection of the basis trading-related positions not being included in the statistics.

3. Data Distortion: Why is the "Invisible Giant Crocodile" Hard to Detect?

TIC data serves as a core indicator for tracking cross-border capital flows in the United States, and its distortion stems from statistical limitations—specifically, the failure to cover the implicit positions formed by hedge funds through basis trading, which can be clearly found in the documents submitted to the U.S. Securities and Exchange Commission by the funds.

As the scale of debt held by hedge funds in the Cayman Islands rises in tandem with the risks of leveraged trading, this "lagging and incomplete" data undoubtedly makes it more difficult to anticipate potential risks in the U.S. Treasury market. As the market fears, once faced with external shocks, high-leverage basis trades may trigger a vicious cycle of "price decline → sell-off → further decline" again, reminiscent of the liquidity crisis.