$12 TN and Counting
Doug Nolan
Money Market Fund Assets (MMFA) surged $132 billion last week to a record $7.654 TN – the largest increase since the week ended April 1, 2020 (massive covid-related QE).
This week saw emerging market (EM) CDS drop five to 130 bps, the low since Q1 2018.
What’s the source of all this liquidity fueling loose conditions and market complacency?
Global finance is in the throes of history’s greatest monetary inflation.
Ongoing unprecedented Credit expansion fuels this inflation.
Excessive sovereign debt growth is the most conspicuous offender.
Corporate debt markets have been booming.
Garnering increasing attention, so-called “private Credit” emerged as a potent force in high-risk lending.
Below the surface – in the shadows yet at the epicenter - a Bubble in speculative leverage evolved into the driving force behind destabilizing liquidity overabundance.
The Bubble thesis holds that unprecedented “repo” financing of Treasury and myriad “basis trades” - coupled with global “basis” and “carry trades” - has been the origin of Trillions of liquidity, inflating speculative Bubbles from sovereign debt, equities, AI, crypto, M&A, upper-end real estate, sports franchises, and global asset prices more generally.
The market is pricing a 95% probability for a Fed cut next Wednesday.
It’s worth noting that money market fund assets have inflated $1.412 TN, or 23%, in 16 months since “The time has come for policy to adjust…
We do not seek or welcome further cooling in labor market conditions”
- Powell’s August 23, 2024, Jackson Hole pronouncement of the end of the Fed’s “tightening” cycle.
But the origins of this great monetary inflation go back further.
Over three years, money market fund assets inflated an incredible $3.07 TN, or 67%.
Back in late-2022, stocks were under significant pressure.
The cryptocurrency Bubble appeared to have burst.
The Bank of England was forced to counter a major gilt market speculative deleveraging.
To sustain its yield curve control (YCC) program, the Bank of Japan purchased a monthly record $128 billion of bonds in December.
A few months later, the collapse of Silicon Valley Bank and the resulting panicky bank run saw Fed and GSE assets inflate $244 billion and $352 billion, respectively.
Myriad fragilities had markets convinced the Fed wouldn’t dare risk raising rates to the point of interrupting loose conditions.
It was a most lucrative bet. “Repo,” “basis trade,” and speculative leverage began expanding aggressively in late 2022.
This speculative Bubble later succumbed to blow-off excess as the Fed and global central community began cutting rates despite highly speculative markets and destabilizing liquidity overabundance.
Over the past 17 weeks, MMFA has inflated $578 billion, or 25% annualized.
Anecdotes point to expanding “basis trade” speculative leverage across markets globally.
Understandably, there are mounting central banker concerns.
Additional insightful commentary (warnings) were provided this week by the Bank of England and Bank of International Settlements.
December 2 – Bloomberg (Greg Ritchie):
“The Bank of England warned about growing risks from a profitable fixed-income hedge fund strategy known as the basis trade, calling on market participants to manage their risk taking to avoid a disruptive unwinding of trades that could prompt volatility in gilts.
Hedge fund net gilt repo borrowing — where they borrow cash by pledging gilts as collateral — reached close to £100 billion ($132bn) in November…, the highest since data collection began.
That compares to a £77 billion estimate in June.
The BOE said the rise in borrowing is related to the cash-futures basis trade…
The bulk of those positions are driven by entities that are managed outside the UK, with hedge funds managed by US managers accounting for around 60% of the figure.
‘The small number of funds running crowded and heavily leveraged trades in the gilt repo market increases the potential risk of sharp moves as funds could need simultaneously to deleverage in response to a shock,’ the BOE said.”
According to Bank of England estimates, hedge fund “repo” borrowings in the gilt market surged 30% just since June.
This parabolic growth is consistent with “repo”/MMFA growth here in the U.S.
And it’s not by coincidence, as U.S. hedge fund managers are responsible for 60% of the UK's phenomenal “repo” expansion.
We can assume that similar aggressive speculative leverage has been employed throughout global markets, explaining what has become systemic liquidity overabundance.
Washington’s Office of Financial Research [OFR] was out Thursday with a weighty blog post, “Sizing the U.S. Repo Market” (Ashlyn Cenicola, Melanie Friedrichs, Robert Mann, and Luke M. Olson).
From the blog:
“According to new data collected by the OFR, the U.S. repurchase agreement (repo) market averaged about $12.6 trillion in daily exposures in Q3 2025, a number that is about $700 billion larger than previous estimates.
The repo market is one of the world’s largest and most important short-term funding markets, providing funding for securities dealers and serving as a cash management tool for banks.
Despite this fundamental role, this market has historically had limited transparency.”
“Of the $12.6 trillion in daily average exposures in Q3 2025, $4.4 trillion was centrally cleared by the Fixed Income Clearing Corporation with another $3.1 trillion settled on Bank of New York Mellon’s (BNY’s) tri-party platform (excluding centrally cleared).
NCCBR [non-centrally cleared bilateral repo] accounted for the remaining $5.0 trillion.”
“In Q3 2025, U.S. Treasuries collateralized 88.9% of exposures in the cleared repo segments, but only 61.8% of NCCBR exposures and just over half (52.6%) of the exposures in tri-party.”
A “repo” market that has inflated to $12.6 TN.
Especially after the 2008 fiasco (not to mention 1994, LTCM in 1998, and March 2020), future historians will struggle to comprehend how speculative leveraging could have been nurtured to such egregious excess.
In no way should have an unemployment rate in the low 4% area justified easing conditions with leveraged speculation running wild.
From the OFR blog post, we have confirmation that non-Treasury securities account for a significant amount of “repo” transactions, especially for transactions not centrally cleared (i.e., Mellon’s tri-party platform and NCCBR).
OFR data also corroborate the thesis of three years of speculative leverage blowoff dynamics.
From September 30th, 2022, to June 30, 2025, hedge fund “repo” borrowings surged $1.972 TN, or 172%, to $3.121 TN.
“Prime brokerage” borrowings inflated $1.404 TN, or 88%, to $3.005 TN.
The section “Borrowing by Strategy (U.S. dollars)” features seven hedge fund categories: Credit, Equity, Macro, Multi-Strategy, Event, Relative Value and Other.
Notably, since September 2022, Multi-Strategy borrowings have surged $3.3 TN, or 235%, to $4.719 TN.
The Equity strategy doubled borrowings over this period to $1.488 TN.
As for size, hedge fund “gross assets” expanded $4.094 TN, or 53%, since Q3 2022 to $11.795 TN, with “gross notional exposure” (incorporating derivatives) inflating $15.146 TN, or 69%, to $37.015 TN.
The largest category, Multi-Strategy, saw gross assets expand $1.314 TN, or 60%, to $3.516 TN, with gross notional exposure surging $4.056 TN, or 55%, to $11.379 TN.
Growth in Treasury positions (cash and derivatives) is even more noteworthy.
Hedge fund long U.S. Treasury exposures inflated $1.483 TN, or 166%, over 11 quarters to $2.379 TN, while Short U.S. Treasury exposures rose $1.15 TN, or 192%, to $1.748 TN.
Speculative leverage won’t balloon forever.
De-risking/deleveraging alarm bells were sounding in early-August 2024, with a destabilizing unwind of yen swaps/derivatives.
Louder alarms began blaring this past April, with a broadly based fledgling de-leveraging spurring sinking stock prices, along with surging Treasury and global bond yields.
The tariff pause rally spurred blowoff levered speculation, with resulting liquidity overabundance masking myriad festering issues.
I can’t imagine a more fascinating market backdrop.
Stocks are basically at record highs, though trading recently with extraordinary volatility.
Bitcoin and crypto under intense deleveraging pressure.
A “repo” market demonstrating notable tightness and instability.
The yen under pressure, with Japanese government bond yields surging to highs since 2007.
A Friday afternoon Bloomberg headline (Elizabeth Stanton):
“US Treasuries Wrap Up Worst Week Since April Amid Fed Doubts.”
“Yields rose… on Friday to finish a week in which they spiked the most since April, when havoc erupted in global financial markets after the US administration rolled out its tariffs agenda.
While traders widely expect the Fed to cut interest rates next week, jitters have emerged over expectations for additional cuts next year.”
I’m unconvinced Fed expectations were behind this week’s global yield rise.
The rates market ended the week pricing almost 100% odds of a cut next week, with the market expecting 58 bps of cuts by the June 17th meeting (down 7bps w-o-w).
Ten-year Treasury yields jumped 12 bps this week to 4.14%, with long-bond yields surging 13 bps to a three-month high 4.79%.
Japanese 10-year yields jumped another 14 bps to 1.95% - the high back to July 2007. Japan’s 30-year yields traded this week at an all-time high (3.41%).
German (2.80%), French (3.53%), Greek (3.39%) and Portuguese (3.11%) yields all traded up 11 bps this week.
German yields ended the week at the highest level since March.
Spanish yields (3.26%) rose 10 bps, with Italian yields (3.49%) nine higher.
Australian yields jumped 17 bps to a two-year high of 4.68%, while New Zealand yields rose 10 bps to 4.35% (3-month high).
South Korean yields increased another three bps to an 18-month high 3.38%.
Our dear friends to the north saw yields spike 26 bps to a three-month high of 3.43%.
December 3 – Financial Times (Elizabeth Menke and Wendi Carver):
“In all the Monday morning quarterbacking of last month’s crypto flash crash, one word turns up consistently: leverage.
Leading up to the crash, open interest in crypto derivatives had reached an all-time high of roughly $115bn.
Within a day, almost $20B in trades were liquidated…
While this may not have been a credit event per se, leverage — seemingly everywhere and nowhere at the same time — plays an integral part in the crypto story.
Collateralised and unsecured lending in crypto has been around almost as long as the asset itself.
After all, what else were you (legally) going to do with it in the early years?
It is cited as the weak link that sent the crypto market into a tailspin in mid-2022.
Since then, other forms of leverage have taken on greater significance, including margin trading on centralised and decentralised exchanges, options and futures open interest, staking as collateral, perpetual futures…, synthetic leverage, and rehypothecated tokens.
Leverage in crypto can be built into smart (ie, programmable) contracts and can arise without explicit borrowing when specific parameters are met.
While recent headlines have raised alarms about the borrowing undertaken by crypto treasury companies, at least you can see it on a balance sheet.
But much of the leverage in crypto actually sits inside the code and the smart contracts.”
After trading down to 83,824 in Monday trading, bitcoin rallied 10,000 (12%) to trade around 94,000 in early Thursday trading.
The cryptocurrencies then reversed sharply lower, with bitcoin trading back down to around 88,000 by Friday afternoon.
I wouldn’t count on a merry crypto holiday season.
I suspect it’s early-innings for crypto deleveraging.
And it wouldn’t take much for de-risking/deleveraging to gain momentum in the levered and crowded AI/tech space.
Market operators, though, study the calendar and see a path to locking in strong 2025 gains.
More importantly, global bond markets remain vulnerable.
For starters, these are highly levered markets facing endless new supply.
Looking at the data, hedge fund leveraging has provided a critical source of demand for heavy government bond issuance in recent years.
Rather suddenly, “basis trade” and hedge fund speculative leverage have come under heightened regulatory scrutiny.
Pressure will mount on dealers to somewhat tighten “repo” securities finance.
December 2 – Bloomberg (Greg Ritchie and Laura Noonan):
“The government-bond trades of the world’s largest hedge funds are facing increased regulatory scrutiny, as officials mull policies that would cap the leverage — and profitability — of popular strategies. In separate reports Tuesday, the Bank of England and the…
Bank for International Settlements delved into the leverage such funds are accumulating through repurchase agreements, where investors borrow cash by pledging bonds as collateral.
Both said borrowing by a small number of large hedge funds poses potential risks to financial stability.
The warnings are the latest salvo in a policy debate that could limit the amount of leverage that can be accumulated in so-called repo markets.”
What’s more, there doesn’t appear much left to squeeze out of the global central bank easing cycle.
Since September 18th, 2024, the Fed has slashed rates 150 bps.
Ten-year Treasury yields closed September 17th, 2024, at 3.65% - 49 bps lower than this week’s close.
December 4 – Bloomberg (Ruth Carson):
“Kevin Hassett may not have the ability to deliver the rapid pace of interest rate cuts US President Donald Trump would like even if he is approved as the next Federal Reserve Chair, said Gregory Peters, co-chief investment officer at PGIM Fixed Income…
‘Does he have the credibility within the committee to drive consensus?’ said Peters, who is also a member of the Treasury Borrowing Advisory Committee…
‘We don’t know that answer.
I don’t think he has that credibility.
I think that’s what the bond market is telling you’.”
Apparently, we’ll have to wait until early in the new year for confirmation that Hassett is the President’s Fed guy.
And for markets, May is increasingly within the timeframe of concern.
For me and others, it’s difficult to envisage Kevin Hassett managing a divided committee and operating as the Fed’s figurehead (including press conferences) without sounding much the partisan political hack.
The confluence of mid-term campaigning and heightened instability will, regrettably, see the Fed knee deep in political muck.
Whether it’s during Powell’s watch or Trump’s Chair, serious deleveraging will expose grave system fragilities.
And I chuckle every time I hear Scott Bessent and others discuss shrinking the Fed’s balance sheet – “a smaller, simpler Fed.”
Whether it’s Kevin Hassett or not, the administration should be careful what they wish for.
Instead, they will oversee a Fed confronting a series of big and complex problems, including markets desperate for liquidity.
A surprising surge in global yields would throw sand in a lot of gears.
December 2 – Bloomberg (Elizabeth Stanton):
“US government debt in Treasuries topped $30 trillion for the first time — having more than doubled since 2018 as the pandemic-era borrowing surge takes its toll.
The combined total amount of Treasury bills, notes and bonds increased by about 0.7% in November to $30.2 trillion…”
December 2 – Reuters (David Milliken):
“The Bank of England said… threats to Britain’s financial system had risen this year due to stretched valuations of companies investing in artificial intelligence, risky lending and bets with borrowed money in government bond markets.
The comments in its half-yearly Financial Stability Report, build on warnings made in recent months by BoE Governor Andrew Bailey and other policymakers…
The BoE judged that Britain’s banking sector was well capitalised and that aggregate indebtedness in the domestic corporate and household sector remained low, but saw risks from overseas and in other corners of financial markets.
‘Overall risks to financial stability have increased during this year.
Key sources of risk include geopolitical tensions, fragmentation of trade and financial markets and pressures on sovereign debt markets,’ Bailey told a press conference.
‘As governments around the world face increasing spending pressures, their capacity to respond to shocks in the future may be more constrained than we’ve seen in the past,’ he added.”
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