I wrote earlier this week about the numerous types of leverage that have built up in the financial system and inflated asset prices over the past three years (link), one of which is the amount of margin debt provided by broker-dealers (at both retail and institutional accounts). FINRA just published margin debt data for July: it hit a new record high of $1.02 trillion, up 1.4% sequentially and 26% (!) vs. a year ago. (This figure doesn’t capture reverse repo, margin loans from banks or other non-bank lenders, and margin-like products such as total return swaps.)
Another type of leverage is primary dealers’ repo lending to hedge funds and others, which remained above $3.8 trillion as of last week, essentially a record high.
Given the surge in NDFI lending, repo lending and margin debt, would it surprise anyone to learn that hedge fund borrowing is at a record high? Per the Office of Financial Research (OFR), it topped $6 trillion for the first time at the end of 1Q25, up 11% sequentially and 26% vs. a year ago. Indeed, both margin debt and hedge fund borrowing are up 25%+ year-over-year. As the Fed noted in its most recent Financial Stability Report, hedge funds’ leverage as of the third quarter of 2024 (the most recent quarter for which the SEC’s form PF data was available) hit its highest level on record.
One more type of leverage? How about primary dealers’ leverage, which was 29x (assets/equity) as of year-end 2024, the highest level in over a decade.
Lots of record highs or decade-highs when it comes to leverage in the financial system. “As long as the music is playing…”