By Hung Tran
With high-tech stocks having just suffered their worst two weeks since April, the world’s attention has largely focused on equity markets. Yet, a more subtle—and potentially more consequential—risk is emerging in US dollar funding markets. Stress here could ripple through the international financial system, posing a threat to global financial stability.
Indeed, US stock indexes have taken a hit. Over the past two weeks, the S&P 500 fell 3 percent, while the tech-heavy Nasdaq dropped 4.4 percent—before rebounding on November 10 as the Senate moved to end the government shutdown. The decline has been attributed to a correction in stretched valuations of tech stocks, particularly the “Magnificent Seven”—including Apple and Nvidia. Many of these are trading at a price-to-earnings (P/E) ratio of well over thirty-five—substantially higher than the S&P 500’s P/E ratio of twenty-five, which is itself considered stretched.
Despite recent declines, however, the S&P 500 still shows a 15 percent year-to-date gain and the Nasdaq is up 20 percent. Against this background, many observers view the correction as healthy, helping to prevent even more extreme overvaluation that could trigger a major crash.
In this context, it is arguably more important to monitor stress in the US dollar funding markets, which could pose risks to investors and investment strategies reliant on abundant dollar funding at relatively low interest rates.
**Pressures in Repo Markets Could Spell Trouble**
In its effort to normalize monetary policy, the Federal Reserve has reduced its balance sheet over the past three years, cutting Treasury holdings through quantitative tightening to about $6.3 trillion as of October 2025. Meanwhile, the US Department of the Treasury has raised its cash position to nearly $1 trillion in Q4, pushing reserves of US banks at the Fed down to $2.8 trillion—the lowest level since 2020.
These developments have contributed to mounting tightness in the repo markets, which reached a gross size of $11.9 trillion in 2024. This tightness, in turn, has pushed the Secured Overnight Financing Rate (SOFR)—a benchmark for borrowing against Treasury securities—well above the Interest on Reserves Balances (IOER), currently at 3.9 percent. The IOER is usually considered the ceiling for overnight rates.
The SOFR-IOER spread has recently been the widest since 2020, while use of the Fed’s Standing Repo Facility—which allows eligible institutions to borrow cash against Treasuries as collateral—has climbed to its highest level since its permanent introduction in July 2021.
As the repo market is a key source of US dollar funding for banks, money market funds, and hedge funds, these developments could spell trouble. Rising repo rates could undermine the cost-benefit calculus behind many of those institutions’ investment strategies.
For instance, hedge funds have increasingly relied on the repo market to fund basis trades—shorting Treasury futures while going long Treasury cash to take advantage of small price movements using significant leverage. Gross short Treasury positions have surged from $200 billion in 2022 to roughly $1.3 trillion today.
Rising repo rates could trigger losses, forcing hedge funds to unwind trades and fire-sell US Treasuries used as collateral, putting downward pressure on Treasury prices and potentially having a destabilizing effect on financial markets and the broader economy.
As highlighted by the International Monetary Fund, the growing interconnectedness between banks and non-bank financial institutions, such as hedge funds, amplifies contagion risk.
**Stress in Dollar Funding Markets Affects Global Banks**
Stress in dollar funding markets also affects non-US banks, which held more than $15 trillion in dollar-denominated assets in 2022. More than 40 percent of non-US banks’ wholesale funding is dollar-denominated, typically short-term, and reliant on frequent rollovers. Without a stable retail dollar funding base, these banks depend on wholesale markets—including repo and currency swap markets—which are less stable.
European and Japanese banks, in particular, have become increasingly dependent on dollar funding as they have increased their US dollar assets to offset weak domestic loan demand amid slow economic growth.
As a result, the dollar funding of European banks has risen to 14.1 percent of total funding in 2024, up from 13.4 percent in the previous year, while for Japanese banks it accounts for 30 percent of their total liabilities.
**Uncertainty Around the Fed Could Fan the Flames**
Given their systemic importance, stress in the US dollar funding markets can transmit rapidly across borders. This strategy was employed during the 2008 global financial crisis, the COVID-19 pandemic in 2020, and the 2023 US regional bank crisis. Financial market participants have thus come to expect the Fed to act as a last-resort stabilizer.
However, under the current administration’s “America First” mindset—and amid US President Donald Trump’s pressure on the Fed to align with his policy agenda—a degree of uncertainty has grown about its response in a future global crisis.
In the end, the real risk to investors and the global financial system may not lie in recent stock market swings, but in the combination of tightening US dollar funding conditions and concerns about the reliability of the world’s most powerful central bank stepping in when it matters most.
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**About the Author**
Hung Tran is a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center, a senior fellow at the Policy Center for the New South, a former executive managing director at the Institute of International Finance, and a former deputy director at the International Monetary Fund.
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*Image: Housing price falling down, real estate and property crash, value drop or decline, home loan or mortgage risk.*
https://www.atlanticcouncil.org/blogs/econographics/yes-tech-stocks-have-taken-a-hit-but-the-real-danger-lies-elsewhere/
