We are deep into the leverage phase now, and the Treasury market under your entire portfolio is the fuse.

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The Fed spent 15 years trying to make markets safer. It built a $2.4 trillion time bomb instead.

Hedge funds now hold $2.4 trillion of US Treasurys, up from $600 billion a decade ago, levered as much as 100 to 1. Every time the Fed backstops the market to kill risk, it invites more borrowing. That trade has already detonated twice, in 2020 and again in 2025.

Here is the loop. A rescue kills risk, cheap risk breeds leverage, the leverage breaks, and the next rescue prints even more money. The leftover QE money is what lit the last inflation. We are deep into the leverage phase now, and the Treasury market under your entire portfolio is the fuse.

The U.S. will have to pay off Treasury debt this year, two thirds of it T-bills that it borrowed last. Until next August, 1/3 of the marketable Treasury debt will have to be paid. The volume of this debt is $10.5 trillion. The curve did not shift uniformly.

Over the past year, we saw a 0.43 point decline in 3-month bills, increase of 0.40 points in 2-year notes and a 30-year bond hit a yield of 5.27% on July 31, which last happened in 2007. In terms of bills, this curve is cheaper than a year ago. In terms of coupons, this curve is far dearer.

At the 2.9% coupon, $2.9 trillion of notes and bonds gets replaced at a 4.3% interest rate, and the $510 billion of 7-year notes of 2019 and 2020, of which a 1.10% coupon was issued, gets replaced at a 4.47% interest rate. This increases the interest payment on the maturing stack by $52 billion a year, only $12 billion of it from bills. This is manifesting itself in what Treasury actually pays. The rate was 3.35% in January, 3.44% in July, and has increased every month. Total federal interest is approximately $1,247 billion a year, or 3.8% of GDP.

Morgan Stanley estimated in late July that leveraged basis trade positions had already shrunk by more than $200 billion as spreads compressed and the easy money faded.
Atlantic Council analysis on August 13 warned that rising long-term yields combined with record margin debt and heavy hedge fund repo use create fresh room for sudden market turmoil.
CME Group launched a new Treasury Link product in early July that makes the basis trade even simpler and cheaper to execute, potentially pulling in more players.
Federal interest costs through mid-2026 were already running more than 10 percent higher than the year before and on track to keep climbing as older low-rate debt rolls off.

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