The fastest growth in the first half of the year is: global "leverage"

Market surface appears calm, but beneath the surface there are turbulent undercurrents. In the first half of 2026, an unprecedented leverage expansion is quietly unfolding within the global financial system—from retail investors' leveraged ETFs, to institutional futures and total return swaps, to the stretching of dealer balance sheets to their limits. The leverage chain has extended to every corner.

Goldman Sachs futures trading expert Robert Quinn pointed out in the latest weekly report that stock financing costs have experienced an "unprecedented" jump this week, with dealer leverage hitting its mid-year historical peak. The financing rate for the September S&P 500 TRF once reached as high as the federal funds rate plus 127.5 basis points. The CME S&P 500 Adjusted Interest Rate Total Return Futures (AIT TRF), which measures U.S. stock financing costs, has climbed to its highest level since the end of 2024.

Andy Kent of broker Kyte said, “Leverage has become one of the core themes facing investors, with margin debt at elevated levels and borrowing continuing to expand across all segments of the shadow banking system.”

The potential risks of this leverage wave cannot be ignored. Bloomberg quoted market participants warning that the explosive growth of leveraged trading products, the expansion of retail margin accounts, and the surge in hedge fund deposits at prime brokers are accumulating systemic risk. Once financing spreads make it unsustainable for a certain counterparty, the entire leverage chain could suddenly reverse, triggering a chain reaction of asset price declines.

Leveraged ETFs and Institutional Positions Form a Resonance

The starting point of this leverage expansion is the frenzied pursuit of leveraged and inverse ETFs by retail investors. Currently, the asset management scale of such products has approached $200 billion, corresponding to a net exposure of about $400 billion. At the same time, the trading volume of leveraged ETFs has also exploded.

Goldman Sachs pointed out that the flow of retail funds into leveraged ETFs has pushed dealers' ability to provide exposure to the hottest targets—including SK Hynix, Samsung, and TSMC—to the limit. Dealers typically use total return swaps (TRS) to meet this demand. Notably, the strong performance of a few leading stocks such as semiconductors and memory chips has also driven organic growth in the asset management scale of related leveraged ETFs, further amplifying the overall exposure.

Institutional demand is equally impressive. Goldman Sachs' futures trading desk noted that due to the market's demand for financing in the information technology sector far exceeding that for small-cap stocks, the implied financing rate spread between S&P 500 and Russell 2000 index futures has risen to multi-year highs, reflecting a high degree of divergence in leverage demand across different assets.

Asian Demand Becomes a Driver, with South Korea Particularly Prominent

Goldman Sachs' analysis points to another important driver of the surge in financing costs: Asia—especially the South Korean market. In a recent report, Goldman Sachs described the trend of the Korea Composite Stock Price Index (KOSPI) as "having evolved into a huge self-reinforcing feedback loop," behind which is the continuous accumulation of leveraged funds.

Although South Korean regulators have tried to tighten controls on total return swaps, the measures have had little effect and have failed to effectively curb the uncontrolled expansion of market leverage. The demand formed by retail investors through leveraged ETFs, combined with the positions built by institutions through TRS, together push dealers' financing capacity to the boundary.

Andy Kent summarized the current situation as a "perfect storm": the rapid growth of leveraged ETFs, the continuous accumulation of long futures positions, the occupation of bank capital by IPO and ADR programs, and the expansion of prime brokerage operations—multiple factors superimposed, collectively driving U.S. market financing costs to "explode upward."

Risk Hedging Intensifies, Leverage Chain Faces Reversal Pressure

Facing the dual pressures of high financing costs and tech stock valuation bubbles, some investors have begun to seek hedging. Banks are observing significant trading flows from clients on both the long and short sides of major macro themes. Raphael Cyna, head of global income structuring at Bank of America, pointed out that investors initially bet on a "stagflation scenario," i.e., falling stocks and rising interest rates; later, some traders shifted to a recession hedge trade of "falling stocks, falling rates," viewing bonds as a traditional safe haven.

JPMorgan strategist Bram Kaplan advised clients to buy S&P 500 call options linked to rising interest rates to capture trading opportunities arising from the correlation between stocks and bonds falling to multi-year lows. Major banks are also continuously launching new variants of hybrid structured products to meet investors' diversified hedging needs in a complex macro environment.

Goldman Sachs' futures trading desk warned that, taking May of this year as a reference, financing costs could rise again as the end of the quarter approaches. The deeper risk lies in: when dealer financing spreads are already at historical highs, once a counterparty cannot withstand the financing pressure and liquidity suddenly tightens, the entire leverage chain—from retail leveraged ETFs to institutional TRS and then to dealer balance sheets—will face a sharp reverse compression. At that point, it will be difficult for risk assets to remain unaffected.

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