City Research Online

Abstract

This article explains a paradox at the heart of contemporary finance: the very properties that make U.S. Treasuries safe – liquidity, low volatility, and privileged collateral status – also make them ideal instruments for extreme leverage and therefore a recurrent source of market instability. It examines the deep entanglements between hedge funds, leveraged finance, and the U.S. Treasury market by tracing the rise of relative-value strategies that have turned safe assets into engines of leveraged speculation and absolute returns. It argues that top hedge funds’ market power derives less from their assets under management than from their capacity to gain leveraged exposures through derivatives, repos, and basis trades, making bond markets unusually sensitive to leveraging and deleveraging. The article thus outlines a ‘leveraged finance complex’ linking top hedge funds, private equity firms, dealer banks, and shadow-banking vehicles such as CLOs. This complex reshaped corporate credit markets during the 2010s by increasing indebtedness, eroding credit quality, and securitising risky corporate debts. The 2019 repo-market panic – the ‘Repocalypse’ – is treated as a revelatory case in which repo-financed Treasury speculation collided with fragilities across this wider infrastructure.

Publication Type:	Article
Additional Information:	© 2026 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group. This is an Open Access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives License (http://creativecommons.org/licenses/by-nc-nd/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited, and is not altered, transformed, or built upon in any way. The terms on which this article has been published allow the posting of the Accepted Manuscript in a repository by the author(s) or with their consent.
Publisher Keywords:	Hedge funds, leveraged finance complex, U.S. Treasury market, repo market, financial instability
Subjects:	H Social Sciences > HG Finance
Departments:	School of Policy & Global Affairs School of Policy & Global Affairs > Department of International Politics
SWORD Depositor:	Symplectic Administrator

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