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Through mechanical forces, biological cells remodel the surrounding collagen network, generating striking deformation patterns. Tethers—tracts of high densification and fibre alignment—form between cells, thinner bands emanate from cell clusters. While tethers facilitate cell migration and communication, how they form is unclear. Combining modelling, simulation and experiment, we show that tether formation is a densification phase transition of the extracellular matrix, caused by buckling instability of network fibres under cell-induced compression, featuring unexpected similarities with martensitic microstructures. Multiscale averaging yields a two-phase, bistable continuum energy landscape for fibrous collagen, with a densified/aligned second phase. Simulations predict strain discontinuities between the undensified and densified phase, which localizes within tethers as experimentally observed. In our experiments, active particles induce similar localized patterns as cells. This shows how cells exploit an instability to mechanically remodel the extracellular matrix simply by contracting, thereby facilitating mechanosensing, invasion and metastasis.