Bank of England chief economist Huw Pill warns that central banks acting as 'market makers of last resort' since 2008 and 2020 have inadvertently encouraged massive leverage, particularly in hedge funds' Treasury and gilt trades, by implicitly guaranteeing those markets stay liquid. The Dallas Fed estimates hedge funds held $2.4 trillion in Treasurys by the end of last year, up from $600 billion a decade ago, financed through leverage as high as 100 times given the thin margins on each trade.
Pill notes this dynamic already forced Fed intervention in 2020's Treasury basis trade blowup and contributed to Trump retreating from tariff plans in 2025 amid swap-market trouble. He points to the Bank of England's 2022 'temporary, targeted' gilt-buying during the pension fund crisis as a rare example of crisis intervention that didn't undermine simultaneous monetary tightening, while warning that emergency facilities elsewhere, including a 2023 US bank bailout that accepted collateral at face value, keep quietly increasing moral hazard.
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