Leverage without a spark
US equity markets enter the fourth quarter carrying more borrowed money, relative to the size of the economy, than at any point since FINRA's series begins in 1997. Customer margin debt reached a record in June and was still up 37% from a year earlier in August. Brokerage cash has grown far more slowly, so the cushion against margin calls has thinned from about 35 cents per dollar borrowed to about 29.
That is the fuel. What's missing is the spark. Credit markets show no stress: the Chicago Fed's financial conditions index is looser than average, banks report no net tightening of lending standards, and business loan delinquencies are edging down. Jobless claims are near their lows.
Rates are the pressure point
The clearest change this month is in the bond market. The 10-year Treasury yield rose roughly half a percentage point in a month to about 5.2%, and the inflation-adjusted yield is near 2.85%. Higher real yields lower what investors will pay for future earnings. That matters most when valuations are already high and borrowing is at a record.
Energy is feeding the inflation story
WTI crude is up about half from a year ago. Headline CPI is running at 3.4% while core inflation is 2.4%. The gap is mostly energy. In the futures market, managed-money positioning shows where speculators are already leaning, which is worth watching if prices turn.
What would change the picture
- Credit spreads widening sharply, or financial conditions turning tighter than average
- A second consecutive monthly decline in margin debt while prices hold up
- The 10-year yield moving toward 5.5%, or falling back below 4.75%
- Weak demand at long-dated Treasury auctions
This note is general commentary on public economic data. It is not investment advice and does not recommend any transaction. Figures are as of the dates shown on the Macro Monitor and may be revised.