Hidden $1 trillion trade puts US financial markets at risk
US debt reaches dangerous levels while complex hedge-fund trades worth $1 trillion raise red flags. Financial experts point to growing risks in treasury markets as borrowing costs climb up
The US financial system faces a two-sided challenge: skyrocketing national debt and risky market practices. Both Donald Trump and Kamala Harris show zero interest in fixing Americas $28.3T debt problem‚ while the deficit stays at 7% (which is unusual in peace-time)
Mohit Kumar from Jefferies points to market worries: “If we get a Republican sweep what happens; it means that Trump has a freer hand to do what he wants and we could see the deficit going up.“ The ten-year Treasury yield jumped 0.63% reaching 4.36% last month
A complex financial setup causes extra trouble: hedge-funds created $1T worth of trades using US debt. Theyʼre working as middle-men between pension-funds and government creating what experts call a basis-trade. The process looks like this:
- Buy treasury bonds with borrowed money
- Sell futures to pension funds
- Make profit on small price differences
- Repeat with more borrowed cash
The Bank of England spotted dangers in this system. Raphael Gallardo from Carmignac explains: “They dont have cash to do everything so their positions are hyper-leveraged; this is actually very dangerous.“ Research shows hedge-funds used just $10B of their money to back $550B in trades
Some experts think its not time to panic yet. Maria Vassalou from Pictet Research says: “US has a very healthy growth rate compared to other major economies and is the major supplier of safe assets.“ However Heather Boushey‚ Bidens economic adviser thinks investment-related borrowing helps growth - even if it adds to debt right now
