U.S. markets face higher leverage as dollar regains momentum

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Highlights

U.S. margin debt hits an all-time high of $1.4tn with annual growth above 50 per cent in April and May, signaling aggressive risk-taking.
U.S. bank loans to non-depository financial institutions surge 30 per cent year-on-year in Q1, now making up 12 per cent of all bank lending versus 10 per cent last year.
The dollar index climbs more than 2 per cent since the Iran war began, reaching a one-year high after the Fed meeting as bullish futures positions spike.

Leverage builds across market channels

As reported by Financial Times, several indicators suggest leverage in the U.S. financial system remains elevated and is still increasing, even if the overall picture is incomplete.

Leveraged exchange traded funds tied to the Nasdaq and the Philadelphia Semiconductor index have grown rapidly this year, adding to concerns that buoyant equity markets are being accompanied by greater risk-taking. Margin debt in investors’ securities accounts stands at $1.4tn as of last month, an all-time high, and its annual growth rate in April and May is above 50 per cent, near the sharp increases seen after Covid and during the 2007 and 1999 bubbles.

Hedge fund borrowing is also at the upper end of its normal range. At the same time, repo market volumes, a key source of short-term secured financing for securities and derivatives trades, peak in January and then level off for about three months, while repo rates remain stable.

Joseph Wang of Money to Macro says data from the Office of Financial Research suggest hedge funds are reducing short positions in Treasury futures, pointing to a pullback in the cash-futures basis trade that has been a major driver of repo demand. He adds that some funds may instead be shifting toward swap spread trades.

Another sign of growing leverage comes from lending to non-depository financial institutions. According to BankRegData, U.S. bank loans to shadow banks, including mortgage lenders, private equity funds and private credit funds, rise 30 per cent in the first quarter from a year earlier and now account for 12 per cent of all bank lending, up from 10 per cent a year ago.

Dollar rebound reflects rate outlook and geopolitical risk

The dollar is also regaining strength after a weak first half of 2025, helped by geopolitical tension and a market view that U.S. interest rates are likely to stay higher for longer. The dollar index has climbed more than 2 per cent since the start of the Iran war and reaches its highest level in a year after last week’s Fed meeting.

Bullish dollar positions in the futures market have risen to their highest level in almost a year, supported by enthusiasm around IPOs and artificial intelligence. Steven Englander, global head of G10 foreign exchange research at Standard Chartered, says the U.S. economy is holding up better than feared and continues to offer attractive risk-adjusted returns for foreign investors.

The dollar’s traditional inverse relationship with stocks is also returning, reinforcing its safe-haven appeal during periods of uncertainty. Analysts increasingly tie the move to widening interest rate differentials, as markets see U.S. rate cuts as less likely while slower growth and fading energy pressure elsewhere could leave room for stable or lower rates abroad.

Elias Haddad at BBH says the dollar index, now around 100, could rise to roughly 102 based on the spread between U.S. two-year yields and those of other G6 developed economies. Still, the outlook remains fragile because any breakdown in an Iran peace deal or a shift in central bank policy outside the U.S. could quickly alter the path for the dollar and broader markets.

Our earlier coverage of stablecoin run risk explained how stablecoins are increasingly intertwined with financial market plumbing rather than everyday payments, making confidence shocks more likely to spill beyond crypto. We noted that if a major issuer faced heavy redemptions, rapid liquidation of reserve assets—potentially including Treasuries—could transmit stress into core funding markets and tighten broader financial conditions.

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