Private Leverage, Public Costs

War, energy shocks and geopolitical crises traditionally send investors running for safety. In the textbook example, stocks fall and money flows into government bonds, especially into US Treasuries. Treasury prices rise, yields fall, and the market for the world’s benchmark safe asset does its best to, as Keynes said of cash in a crisis, “lull our disquietude.”

The past eighteen months, however, have not followed the textbook. Government bonds are being hammered across the developed world: on August 19, thirty-year Treasury yields topped 5.3 percent, their highest level since 2007. Higher yields raise borrowing costs for households, firms, and governments alike, and have turned into a political problem for a Trump administration that promised lower mortgage rates and cheaper money.

That day, US Treasury Secretary Scott Bessent, a former hedge fund manager who has described his current role as “top bond salesman,” announced that the Treasury would step up purchases of longer-dated government bonds through its existing buyback programme. Officially, the Treasury buyback operation is about liquidity support: buying older, less actively traded Treasuries to improve the smooth functioning of the bond market. In practice, Bessent is trying to bend the yield curve. So far, the buyback announcement has not ended the bond market turmoil but only exposed the underlying problem facing the Treasury Department: the market for the world’s benchmark safe asset now requires increasingly active public management just to remain—or rather appear—orderly.

But crucially, in attempting to take on this more active management role, the options that Bessent and Federal Reserve Chairman Kevin Warsh face are constrained by the Treasury market’s entanglement with the world of leveraged speculation from which Bessent himself emerged. The problem with the Treasury market is that some of today’s most important “bondholders” are not creditors in the simple sense of lending saved cash to the state. Top multi-strategy hedge funds are elite financial firms that borrow trillions of dollars to build exposures to Treasuries and other assets, safe and otherwise. I’ve written elsewhere about “the paradox of safe assets”: the very safety of Treasuries—enabled by their high liquidity, low volatility, and privileged status as collateral—means that they are ideal instruments for leveraged speculation. 

Hedge funds borrow heavily against Treasuries, and in times of crisis, it is generally easiest to sell off safe assets first. Hence the Treasury market becomes the place where stresses generated elsewhere in the financial system are released—through the price volatility, yield spikes, and liquidity strains we are witnessing today. And the stabilization of the Treasury market becomes the stabilization of a financial system made fragile through leverage that fewer and fewer can afford.

The allure of safe assets

First and foremost, it is worth pausing over a simple fact: hedge funds speculate in public debt. This is not breaking news, but it should merit more attention than it usually receives. Hedge fund activity in the US Treasury market is often brushed off as unimportant because the assets under hedge fund management can appear almost modest when compared with the balance sheets of major banks, the portfolios of pension funds, or the assets managed by BlackRock, Vanguard, and State Street (over $30 trillion between the three). SEC private fund statistics put hedge fund net assets at roughly $5.4 trillion in 2025: enormous in ordinary terms, but small relative to the commanding heights of asset management capitalism.

However, the power of hedge funds stems from what they can control through leverage, not merely what they own outright. Conservative estimates based on SEC data place hedge fund gross notional exposure (the total scale of their positions across markets through various forms of leverage), at roughly $35 trillion in 2025, with the top ten funds alone—not ten percent, just ten funds—accounting for around 40 percent of this exposure.1 See Stefano Sgambati, “The Paradox of Safe Assets,” (<)em(>)New Political Economy(<)/em(>) (2026): 1–22. Gross notional exposure is calculated by summing long and short notional exposure totals across all investment types from Tab.8.16 and Tab.8.17 of the SEC Private Funds Statistics, first calendar quarter 2025, supporting data. These are not minor “alternative” players operating at the margins of finance, but institutions that can move, and therefore undo, markets.

Much of these funds’ leverage involves Treasuries. Top hedge funds do not buy Treasuries simply because they are safe, but because their safety makes it possible to borrow heavily against them, finance positions cheaply, and scale tiny price discrepancies into “absolute returns”—profit regardless of the success of the market. Hedge funds have mastered the art of making money out of usually stable assets: high alpha out of low beta. As a result, they reportedly hold more Treasuries than are officially registered to Japanese, Chinese, and Saudi Arabian investors combined.  

However, hedge funds’ appetite for Treasuries is not constant. It depends on what is happening elsewhere: in equities, corporate credit, private capital, funding markets, and dealer balance sheets. To understand why hedge funds have become so deeply involved in Treasuries, we therefore have to look beyond the Treasury market itself. The developments leading up to the repo market panic of September 2019—“the Repocalypse”—give us an important clue as to what may be happening today. 

The expansion of leveraged finance

For more than a decade after 2008, ultra-low interest rates and repeated rounds of quantitative easing (QE) created a fertile environment for corporations to borrow cheaply to carry out mergers and acquisitions, leveraged buyouts, dividend recapitalizations, and stock buybacks—all practices of “shareholder value maximization.” 

Private equity sat at the centre of this growth in corporate leverage. Buyout firms used debt to acquire companies (leveraged buyouts) and then loaded much of that debt onto the companies themselves, which they reorganized around dividend recaps, refinancing, asset sales, cost-cutting, and eventual exit. All of this generated vast quantities of speculative-grade corporate debt: leveraged loans and high-yield bonds. This junk debt was not incidental to the model: it was the model (and still is).

Crucially, just as in the case of subprime mortgage loans in the 2000s, a great deal of this junk debt was not held by banks, but placed into bankruptcy-remote, shadow banking vehicles: collateralized loan obligations, or CLOs. CLOs buy pools of leveraged loans and finance those purchases by issuing different layers of securities to investors. In this way, risky corporate debt is bundled, tranched, rated, sold, and transformed into something that can circulate through the portfolios of insurers, pension funds, asset managers, private equity firms, and hedge funds. For holders of CLO equity tranches—mainly private equity and hedge funds—the weaker the corporate balance sheets, the higher the corporate borrowing costs, the greater the return on equity.

Large dealer banks such as JP Morgan and Goldman Sachs make this whole system work by arranging and syndicating leveraged loans to be packed into CLOs. At the same time, they finance hedge fund borrowing, serve as primary dealers in US Treasuries and other safe assets, and run the matched repo books that connect leverage-hungry speculators to cash-rich money market funds. In short, dealer banks are the balance sheet infrastructure through which corporate credit, sovereign debt, equity markets, and money markets become entangled with the operations of hedge funds, private equity, and leveraged entities alike: “alternative” financial firms whose business model rests on borrowing at scale while making sure that others pay for it.

I call this whole machinery the “leveraged finance complex.” By 2018 and 2019, stress in this complex was becoming harder to ignore. Corporate debt had risen sharply while credit quality had deteriorated, as leveraged lending and CLO issuance had become central to the financing of private equity and speculative-grade firms. The conditions that had made leveraged finance so attractive to investors were changing: in 2017 the Fed began shrinking its balance sheet in a tightening operation, and interest rates were rising accordingly.

Unsurprisingly, as highly indebted firms struggled, equity markets turned more volatile. In December, the S&P fell dramatically while spreads on leveraged loans and CLOs rose sharply. The private equity and CLO machine was still operating, but the margins were thinning—both the equity margins underpinning the machinery of leverage, and the profit margins oiling it. These developments did not go unnoticed by central bankers, the IMF, and financial journalists, who issued warnings and struck alarmist notes about corporate credit markets throughout 2019. 

Hedge funds, for their part, had already taken countermeasures. From early 2018, they had started to significantly reduce gross exposure to equities while increasing exposure to safe asset markets, especially Treasuries. This made sense. Equities and corporate debt were increasingly tied to fragile corporate balance sheets and deteriorating credit conditions. Treasuries, by contrast, remained liquid, financeable, and privileged as collateral.

This was not a “flight to quality” in the usual sense, but a migration of leverage from one part of the financial system to another. Treasuries became more attractive than usual because they allowed hedge funds to continue doing what they do best: convert small spreads into large returns through cheap borrowing, even as tighter monetary policy made other leveraged trades more precarious.

The Repocalypse

Hedge funds’ gross Treasury exposure nearly doubled in eighteen months, from around 1.2 trillion dollars in early 2018 to more than 2.2 trillion by September 2019. This required funding, and dealer banks obliged via the overnight repo market: the short-term funding market where securities, above all Treasuries, are exchanged for cash. More precisely, this is the place where the financial system manufactures liquidity daily: through repos, securities are pledged, financed, re-pledged, and financed again, allowing balance sheets to expand and leveraged exposures to grow.

However, this growing appetite for leveraged Treasury trades compounded pressure on dealer bank balance sheets at precisely the wrong moment. Following tax cuts and expanding fiscal deficits by the first Trump administration, US Treasury issuance reached historically high levels, exceeding $1 trillion annually in both 2018 and 2019. Large dealer banks were absorbing vast quantities of government debt, often holding it temporarily on their balance sheets before distribution. At the same time, the Fed was selling Treasuries back to the market during its tightening program, such that aggregate bank reserves fell from a peak of roughly $2.8 trillion to under $1.4 trillion by September 2019.

After months of high demand for financing coming from both the state issuing high amounts of public debt and hedge funds looking to leverage their exposures to Treasuries, all while reserves were shrinking, dealer banks were overstretched. The funding squeeze came in September 2019, when the US repo market suddenly seized up. On September 16–17, overnight repo rates spiked abruptly, in some transactions reaching nearly 10 percent. The trigger was a combination of two routine events: US corporations were making quarterly tax payments, withdrawing cash from money market funds to pay the Treasury, while at the same time a large volume of newly issued Treasuries was settling, causing primary dealers to scramble for cash.2When the Treasuries that primary dealers use as collateral security to obtain cash from money market funds reach maturity, they must replace them with new-issuance Treasuries, or they risk losing the cash. Money market funds pulled back and banks refused to lend. The deepest funding market in the world stopped behaving like a market at all.

The Fed intervened immediately. Beginning on September 17, it launched daily overnight repo operations of $50–100 billion, soon supplemented by longer-term repos. These operations did not remain a brief emergency gesture. By October and November, the Fed was injecting liquidity into the repo market on a continuous basis, and the operation, in essence, never stopped: it simply got folded into the wider pandemic bailouts of 2020.

But the roots of the problem lay beyond the repo market. The Fed’s repo injections could relieve immediate funding pressures, but not the mounting strains across the leveraged finance complex that were generating those pressures in the first place. When those strains intensified in early 2020, the limits of this approach became apparent. Continuing repo injections—still over $100 billion daily in January and February 2020—did nothing to prevent a Treasury fire sale when hedge funds started deleveraging en masse as distress mounted in equity and corporate credit markets. This fire sale triggered a wave of margin spirals across financial markets. By mid-March, with securities markets at large in shambles, and investors withdrawing cash from money market funds and ETFs, the Fed changed gear and officially launched QE4—or QE infinity, as some have called it.

Since the coronavirus pandemic and the banking crises of early 2023, the propensity for Treasury market stress has not abated.3The 2023 regional banking crisis was triggered when rising rates pushed down the market value of older Treasuries, leaving banks such as Silicon Valley Bank with large unrealized losses. When deposit withdrawals forced them to sell those bonds (to obtain cash), those losses crystalized, exposing balance sheets that had effectively gone “underwater.” In April 2025, during the controversy over “Liberation Day,” a tariff-driven equity rout spilled into the US Treasury market. Hedge funds and levered ETFs had just dumped more than $40 billion of stocks, while S&P 500 companies had lost trillions in market value. Days later, the refuge for all of this money nearly collapsed as Treasuries sold off sharply, and their yields rose. Once again, stress that started elsewhere travelled into the safe asset core of global finance—and was not alleviated.

The same pattern has reappeared in 2026. In March, as the war with Iran escalated, global stocks slumped, and hedge funds sold global equities for four consecutive months, at the fastest pace in thirteen years.  But again, bonds failed to behave as a safe haven against uncertainty: yields rose. On March 20, the US ten-year Treasury yield jumped more than ten basis points in a single session to 4.384 percent. 

By July, crowded technology trades came under pressure, with hedge funds deleveraging as some positions became harder to exit and more expensive to hold. The portfolio collapse of Situational Awareness, an AI-focused hedge fund whose leveraged tech bets forced a rapid portfolio unwind, showed how quickly crowded trades could turn into forced selling. Weeks later, Treasury bond yields were creeping so high as to elicit Bessent’s current experiment in bond market jawboning.

As the Treasury secretary feels compelled to manage the yield curve of the world’s benchmark safe asset, the costs of private leverage begin to appear as public costs. It’s the same old story. When the leveraged finance complex works, hedge funds, dealer banks, private equity firms, and asset owners capture the returns. And when it falters, public authorities are called upon to provide liquidity and stabilize the infrastructure on which those returns depend.

The cul-de-sac of financial governance

The Fed has long bought and sold Treasuries through open market operations, but primarily as a way of managing money market conditions and implementing monetary policy, not of propping up the Treasury market itself. Outright purchases large enough to stabilize bond prices today would expand the Fed’s balance sheet and inject liquidity into the financial system, looking uncomfortably like a return to QE at a time of persistent inflation concerns.4This is not to suggest that any Treasury purchase programme by the Fed would necessarily have significant inflationary effects, since much would depend on its scale and design. The more immediate issue is institutional: a program explicitly aimed at stabilizing Treasury prices would signal that the Fed once again stands ready to extend its backstop beyond funding markets (as in 2019), and even beyond risky corporate credit markets (as in 2020), to the very safe-asset core of global finance.

Instead, attempting to resolve the current bond market rout has become a problem of Treasury governance. Bessent’s buyback programme is a debt management operation that does not entail money creation: the Treasury uses its existing cash balances to buy back older, less liquid bonds in order to improve the marketability of its own liabilities. The significant development, then, is not simply that the Treasury is buying Treasuries, but that the Treasury market itself now requires active “liability management.” Historically, US government debt could largely be treated as naturally liquid, marketable, and stable, without active official support. But as more and more private leverage has been stacked upon public debt, those qualities can no longer be taken entirely for granted: safe assets themselves must increasingly be managed so that they remain “safe.”

The result is a Trump administration politically aligned with private markets and alternative finance that now finds itself using the state’s fiscal capacities to manage the market for its own liabilities. In this respect, Bessent, the former hedge fund manager turned Treasury secretary, personifies the deeper fusion of public debt and private leverage. In the language of my forthcoming book, Bessent comes from the world of “absentee debtors”: elites who build wealth and power not by lending capital, but by organising leverage and stacking debt over debt through corporate, financial, and institutional structures, while shifting the risks and costs of that leverage elsewhere.5See also Stefano Sgambati, “(<)a href='https://doi.org/10.2218/finsoc.7115'(>)Who Owes? Class Struggle, Inequality and the Political Economy of Leverage in the Twenty-First Century(<)/a(>),” (<)em(>)Finance and Society(<)/em(>) 8, no. 1 (2022): 1–21; Stefano Sgambati, “(<)a href='https://doi.org/10.1177/10245294241265819'(>)The Invisible Leverage of the Rich. Absentee Debtors and Their Hedge Funds(<)/a(>),” (<)em(>)Competition & Change(<)/em(>) 28, no. 5 (2024): 625–42.

This is not a conspiracy, but what the Financial Times has described as a “toxic codependency” between leveraged private actors and the Treasury.  Treasury markets are too important to fail. If Treasury liquidity disappears, or if yields rise suddenly because leveraged funds are deleveraging, the problem does not remain inside the hedge fund industry. It spreads through banks, money markets, pension funds, insurers, asset managers, public borrowing, corporate finance, and household balance sheets. Even more ominously, the leveraged finance complex—which includes a variety of markets now addicted to cheap leverage, including equities, corporate credit, commodities, and energy—is too important to fail, because its disorderly unwinding would threaten the refinancing machinery on which much of corporate America now depends.

If yields keep rising, it will raise refinancing costs across leveraged loans, high-yield bonds, private credit and venture debt. According to a recent leveraged-finance industry report, “a looming $15 trillion refinancing wall [is] maturing in 2026–2028, including a $229 billion high-yield bonds maturity wall and a $530 billion leveraged loans maturity wall coming up in 2028.” If these deadlines hit without a reduction in yields, highly indebted firms may face downgrades, defaults, restructuring, or cost-cutting.

And so, society as a whole is made to live with leverage that cannot be allowed to unwind—leverage organized overwhelmingly for the benefit of economic elites. We all live under a sword of Damocles suspended by absentee debtors. Like leveraged landlords whose mortgages are serviced by their tenants, absentee debtors accumulate wealth because others bear the costs that make their leverage profitable. We all end up paying, one way or another, both for their leveraging—when they make absolute returns we can only dream of, thanks to privileged access to cheap, scalable, limited-liability debt, while we experience rising rents, costs, suppressed wages and degraded services that sustain those returns—and for their deleveraging, when we are made to bear their losses and underwrite their soft landing.

As the fiscal and monetary authorities look for new fixes, new rules, new mandates, new tools that make the system more “resilient,” they also make private leverage more governable, more scalable, and more institutionally protected. This is the cul-de-sac of financial governance: each rescue stabilizes the system, but each stabilization also preserves the conditions that make the next rescue necessary. 

The paradox of safe assets thus points to a difficult question: when public debt and private leverage become unhealthily locked together, should we keep trying to make the relationship work better, or finally ask what it would mean to part ways?