Central banks stepping in as market makers of last resort during the 2008 and 2020 crises may be encouraging excessive leverage, a Wall Street Journal analysis reported by Investing.com found. Hedge funds' US Treasury holdings have grown to $2.4 trillion, up from $600 billion a decade earlier, and the analysis frames the challenge as designing facilities that restore liquidity without becoming a standing guarantee for risk.
Hedge funds pile into leveraged Treasury trades
Central banks built emergency facilities to keep bond and repo markets functioning when forced selling threatens to destabilize them. But the Wall Street Journal analysis found that the expectation of intervention also lowers investors' perceived risk, encouraging more leverage and borrowing.
Hedge funds are central to that concern. Their US Treasury holdings reached $2.4 trillion at the end of 2025, up from $600 billion a decade earlier, according to estimates from the Federal Reserve Bank of Dallas. Funds sometimes apply leverage of up to 100 times to extract meaningful returns from small pricing gaps between government bonds and related futures or swaps.
Bank of England Chief Economist Huw Pill said mechanisms introduced to reduce financial vulnerability could create new weaknesses instead. Central bank assurances that repo and government bond markets will stay liquid make it easier for leveraged investors to finance these trades, and their buying can push government bond yields lower, cutting borrowing costs for the state.
A model that worked in 2022
The arrangement holds until markets turn sharply and highly leveraged positions are forced to unwind. Central banks may then need to intervene again, reinforcing expectations of future support and setting up the next build-up of risk. The collapse of Treasury basis trades helped trigger Federal Reserve intervention in 2020.
Pill pointed to the Bank of England's temporary gilt purchases during Britain's 2022 pension-fund crisis as a better model, since the targeted action stopped forced selling without abandoning the central bank's broader monetary tightening. The challenge, according to the analysis, is designing facilities that restore liquidity in emergencies without becoming a standing guarantee that rewards excessive risk.
Rescue facilities can outlive their crisis
Crisis programs can also interfere with monetary policy after the emergency passes. The Fed's 2023 bank rescue facility was later used by healthy institutions as a cheap source of funding, leading officials to tighten its terms before it expired.
Source: Economy News
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