Central banks have sold $82 billion in U.S. Treasuries since the Iran war began, according to Federal Reserve custody data, marking the lowest foreign holdings since 2012 at $2.7 trillion. While this amount is relatively small in the broader market context, the timing has raised questions about whether geopolitical tensions are driving a shift away from dollar-denominated debt.

However, the more significant story may lie with hedge funds, particularly those in the Cayman Islands. New York Federal Reserve research reveals these funds now hold $2.4 trillion in long Treasury positions, with official TIC data potentially undercounting their holdings by $1.4 trillion. Between 2022 and 2024, hedge funds absorbed 37% of net Treasury issuance, nearly matching all other foreign investors combined.

This concentration of hedge fund activity presents both opportunities and risks. While their purely financial motivations have provided liquidity and softened market impacts during Federal Reserve bond sales, their collective movements could create stability risks if economic conditions shift. With Treasury Secretary Scott Bessent facing $10 trillion in debt rollovers next year, market participants are watching both traditional central bank activity and the less visible but increasingly influential hedge fund positions in the Cayman Islands.