DNA methylation deregulation at partially methylated domains (PMDs) represents an epigenetic signature of aging and cancer, yet the underlying molecular basis and resulting biological consequences remain unresolved. We report herein a mechanistic link between disrupted DNA methylation at PMDs and the spatial relocalization of H3K9me3-marked heterochromatin in aged hematopoietic stem and progenitor cells (HSPCs) or those with impaired DNA methylation. We uncover that TET2 modulates the spatial redistribution of H3K9me3-marked heterochromatin to mediate the upregulation of endogenous retroviruses (ERVs) and interferon-stimulated genes (ISGs), hence contributing to functional decline of aged HSPCs. TET2-deficient HSPCs retain perinuclear distribution of heterochromatin and exhibit age-related clonal expansion. Reverse transcriptase inhibitors suppress ERVs and ISGs expression, thereby restoring age-related defects in aged HSPCs. Collectively, our findings deepen the understanding of the functional interplay between DNA methylation and histone modifications, which is vital for maintaining heterochromatin function and safeguarding genome stability in stem cells.