{"text":[[{"start":5.75,"text":"Is the Iran war prompting some non-American governments to ditch dollar debt? That question has recently hovered over the markets, amid weak Treasury auctions — and a near-50 basis point jump in 10-year bond yields since the war started (albeit now slightly reversed). "}],[{"start":27.33,"text":"And the FT has now also revealed that non-US central banks have sold $82bn worth of Treasuries since the war started, according to Federal Reserve custody data. That leaves their $2.7tn holdings at the lowest level since 2012."}],[{"start":46.61,"text":"Of course, $82bn is a piddling amount in the grander scheme of things. And those custody statistics slightly jar with the better-known Treasury International Capital (TIC) cross-border data. Moreover, central bank sales probably reflect a need to amass a defensive war chest in turbulent times, rather than anti-US sentiment. Some central banks, like the Polish one, are selling gold for that reason. "}],[{"start":76.31,"text":"However, since this news comes amid reports that Iran is demanding payment for passage through the Strait of Hormuz in Chinese yuan or crypto — and trolling cartoons from China’s state media mocking dollar dominance. So it is no surprise that central banks’ sales have raised eyebrows. In febrile times, Fed custody data packs a punch. "}],[{"start":101.49000000000001,"text":"However, there is a certain irony here. For while central banks grab the spotlight, they are not the only non-US players that matter. Far from it: hedge funds could prove even more important if the Iran war drags on — particularly those in the Cayman Islands. "}],[{"start":120.59,"text":"Some striking research from the New York Federal Reserve explains why. This starts by noting that since 2018 leveraged hedge funds have dramatically increased Treasury holdings."}],[{"start":133.83,"text":"This reflects a boom in so-called basis trades (where funds exploit the gap between futures and cash prices). But the Bank for International Settlements says that hedge funds’ “swap” trades (between Treasuries and other securities) have also recently exploded. "}],[{"start":152.06,"text":"Thus by late 2025, hedge funds held $2.4tn long Treasuries positions and $1.6tn short positions — almost treble the level three years earlier, according to the Office for Financial Reporting. This is a sharp contrast to other non-US investors, like the Chinese government, which have slowed Treasury purchases so markedly that foreigners now own less than 30 per cent of all Treasuries, down from 46 per cent in 2008. "}],[{"start":183.9,"text":"But what is even more notable is the opacity of these cross-border hedge fund flows. Official TIC data suggests these are quite modest. However, Fed economists think TIC data is undercounting these flows by an eye-popping $1.4tn."}],[{"start":204.04000000000002,"text":"Thus “the Cayman Islands is [now] in fact the largest foreign holder of US Treasury securities — holding significantly more than China, Japan and the United Kingdom,” Fed economists argue. Indeed between 2022 and 2024, hedge funds “absorbed 37 per cent of net issuance of notes and bonds”, they say, noting this was “nearly the same amount as all other foreign investors combined”. (original italics.)"}],[{"start":234.37,"text":"And this affects more than Treasuries. The Bank of Japan recently also revealed an explosion in hedge fund purchases of Japanese government bonds. Surprisingly, this attracted scant attention."}],[{"start":248.5,"text":"Is this bad? Some hedgies, like Ken Griffin of Citadel, argue not. And while this is self-serving, he has a point. Hedge fund demand for Treasuries, say, has previously softened the impact of Fed bond sales when it abandoned quantitative easing. It has also provided welcome liquidity at a time when big banks have reduced their traditional market-making activities. And the beauty of hedge fund trades is that these purchases are driven purely by financial calculations, not political bias — unlike some governments. "}],[{"start":286.38,"text":"But therein lies the big danger too: if economic or financial fundamentals suddenly change in a way that makes these trades less compelling — say, via higher rates — many funds may all head for the exit, creating potential financial stability risks. That happened in March 2020, after the onset of Covid. So, too, in April 2025, with the so-called “liberation day” tariffs. "}],[{"start":315.82,"text":"Could it happen again with the Iran war? One hopes not. Scott Bessent, US Treasury secretary, is determined to maintain market calm — and has hitherto done this, to an impressive degree, by using numerous tricks. "}],[{"start":332.51,"text":"And while it seems that some crowded hedge fund trades were “flushed out” at the start of the Iran war, that has (thankfully) not accelerated. Meanwhile, long-term asset owners — like insurance companies — show no significant desire to exit. "}],[{"start":349.7,"text":"But will this relative calm continue if the Iran war drags on, raising inflation risks or (heaven forbid) creating more geopolitical shocks? We do not know. "}],[{"start":362.08,"text":"The one thing which is crystal clear is that Bessent needs to roll over 33 per cent of US debt next year, equivalent to $10tn in Treasury sales. So investors watching Iran should track the Cayman Islands too — and pray that Bessent’s conjuring continues to work."}],[{"start":390.36999999999995,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1775271870_6572.mp3"}