Key Treasury Department data is massively underreporting the amount of U.S. government debt held by hedge funds registered and incorporated in the Cayman Islands, and is failing to reflect their heavy reliance on a controversial leveraged trade that has repeatedly alarmed regulators.

In

a note released on Wednesday, a team at the Federal Reserve found that U.S. Treasury International Capital data appears to be “severely” undercounting the amount of Treasurys held by those hedge funds, to the tune of about $1.4 trillion as of the end of the 2024. In addition, the Fed team concluded that TIC data is not capturing just how much Cayman-domiciled hedge funds are dominating positions in the so-called basis trade.