Last month I talked about personal loan ABS as the trigger for what's coming, and that's still correct. However, recent events have connected more of the dots as Cayman Islands hedge funds now hold more combined US Treasuries than foreign countries combined. Watch the short I made first down below:

Here's the recent data brought out by the Federal Reserve about the Cayman Islands hedge funds:

https://www.federalreserve.gov/econres/notes/feds-notes/the-cross-border-trail-of-the-treasury-basis-trade-20251015.html?utm_source=chatgpt.com

Most 401(k)s, IRAs, Roth IRAs, etc, don't directly hold ABS like personal loan or auto loan tranches. Instead they hold funds (mutual funds, ETFs, target date funds, or bond funds) that do. Typically the funds often buy ABS (backed by consumer loans, credit cards, or auto loans), MBS, CLOs (backed by corporate/private credit loans), corporate bonds and treasuries, and equities. Usually you'll see it as something listed like “core fixed income”.

The typical exposure levels are: 

Across all accounts, the average American saver probably has 5-10% of their retirement money exposed to ABS, though many have more if they're overweight in credit or income funds.

Scale of the exposure:

If ABS markets backed by private credit (especially personal loans) crack: 

It wouldn't look like 2008 subprime mortgages collapsing, but more like a slow erosion of fixed income portfolios that quietly shave off retirement balances before the public even realizes what happened.

These ABS lines are exactly where private credit backed personal loans are appearing.

Many fintech lenders (like SoFi, LendingClub, Upstart) now securitize their consumer loan portfolios to raise cash. 

As interest rates diverge worldwide, and if defaults rise, then ABS could see price compression, affecting every retirement portfolio that includes them.

Most investors never look below the Asset Backed Securities (4.7%) line, but that's where private credit and unsecured personal loans are creeping in.

SoFi Closes 697.6 Million Securitization of Loan Platform Business Volume 2025: https://share.google/1usjRCO1htMEVY2nL

Typical portfolio: 

Even though consumer loan ABS is a small slice, a severe repricing could trim 1 - 4% off an entire retirement account, before any equity reaction. If contagion spread to other credit assets, equity and bond losses would compound.

In a chain of transmission, consumer loan ABS is repriced as investors mark down those bonds; and dealers widen spreads. Private credit funds and structured credit ETFs take NAV hits, building redemption pressure, forcing the sale of other credit. Corporate bond spreads widen as risk appetite collapses. Equity markets re-rate earnings expectations lower and financial stocks drop first. Finally, Treasuries rally initially (flight to safety) but may sell off if inflation or funding stress appears.

Let's take the same example of the 401(k) and apply it with the compounded rate:

A modest 5% exposure to consumer loan ABS could, through contagion, compound into a 20-25% portfolio drawdown if risk spreads blow out across credit and equities. 

Even though personal loan ABS is small in absolute size, it sits at the risk margin of the credit system. If confidence breaks there, the repricing of risk can and will: 

The Fed finds that Cayman domiciled hedge funds are much larger holders of US Treasuries than standard cross border data show - roughly $1.85T of estimated holdings and a $1.4T undercount in TIC as of end 2024. That expresses a big, leveraged, repo funded basis trade footprint that's easier to hide and therefore easier to unwind.

Hedge funds in the Caymans are buying Treasuries and shorting futures (the basis trade) financed largely by repo; much of that activity isn't fully captured in public TIC reporting, so official cross border statistics understate the true size and fragility of the trade. That means systemic leverage is larger than most investors/policymakers realize.

These trades use purchased Treasuries as collateral in repo. If counterparty lines squeeze, haircuts rise, or FICC sponsored repo flows reverse, funds must deleverage fast - selling Treasuries or closing futures shorts - which can spike Treasury yields and destabilize funding.

The undercount $1.4T distorts official Financial Accounts (Z.1), household networth/saving calculations, and our read on who holds Treasuries - making regulators react slower or misjudge where risk sits. The Fed explicitly flags this mismeasurement and its macro accounting consequences.

When hedge funds pile into Treasuries and fund via repo, they absorb available collateral and increase repo activity. If funding tightens, the scramble for collateral (and the need to post high quality assets) spikes.

If basis trades unwind, hedge funds sell Treasuries and may also liquidate other financed positions (including structured products) to meet haircuts. That forces price discovery in thin markets and quickly widens spread across credit markets.

ABS (including personal loan ABS) are often used as collateral in repo, and rehypothecation, across desks. A repo squeeze raises haircuts on ABS, triggers margin calls for private credit funds and ABS repo users, causing forced sales of ABS tranches - exactly the cascade I've described.

Higher haircuts, reduced sponsored repo, fewer warehouse lines for originators (repo providers become conservative first).

Large funds will reduce exposure to levered basis trades and credit long strategies. That can push credit spreads wider and equities down.

Paradoxically, Treasuries may sell off during forced liquidation even as risk assets fall. That produces the kind of whipsaw we saw in March 2020.

Bottom Line: The Feds note shows a large, hidden, repo funded position in Treasuries concentrated in Cayman hedge funds. That means the system has more leverage and a faster transmission channel (repo -> basis unwind -> ABS haircuts -> private credit margin calls) than most public data suggests. In short: the plumbing that would transmit a shock to personal loan ABS is very much in place - and it's bigger than our headline data show.

Many hedge funds buy cash Treasuries and short futures, financing the cash leg with repo using Treasuries as collateral. The Fed's note says a huge amount of that activity sits in Cayman domiciled funds - i.e. heavily leveraged, opaque, and funded through repo/prime broker channels that can move instantly. 

That creates a giant, leveraged position that's easy to build and very fast to unwind. When it unwinds, it doesn't just hit Treasuries - it forces repo counterparties and prime brokers to raise haircuts or restrict sponsored repo, which ripples to other financed assets (ABS, CLOs, private credit) that depend on the same plumbing.

The carry trade becomes more fragile. With big hedge funds playing basis and financing via repo, any rise in funding cost or haircut causes a rapid reversal of carry.

Previous large carry episodes (i.e. yen carry) were driven by central bank policy gaps. Here the fragility is in short-term funding plumbing repo haircuts, prime broker lines), not only central bank rates. FX moves can still trigger it. If BOJ action (or other central bank moves) causes rapid cross currency funding stress or hedging costs spike, leveraged carry positions funded in one currency become expensive to roll and get closed out - same results, different conduit.

Repo haircuts on lower quality collateral widen first. Dealers will immediately raise haircuts on anything that's not HQLA - that includes personal loan ABS. As margin calls cascade to private credit funds and originators rely on repo or warehouse lines, they must sell assets or call partner capital - but the market for personal loan ABS is thin, so selling causes big price gaps.

Illiquid private funds faced with redemptions will sell whatever they can, including corporate bonds, CLO tranches, and ABS - the contagion across credit is fast.

Because Cayman hedge funds are such large holders of Treasuries and are heavily repo funded, the system now has a bigger, faster lever than most official data reflect. That leverage sits directly over the same plumbing that funds ABS and private credit. The first trigger will almost certainly be a funding plumbing event (repo haircuts or basis blowout), not a slow deterioration of consumer credit - and when it hits, it can propagate rapidly into personal loan ABS via margin calls and forced selling.

The spark comes from Treasury repo markets (basis trade unwind), as the fire spreads to ABS and private credit (via funding and margin stress), the smoke shows up in consumer delinquencies, HY bonds, and equities. So yes - it's the same underlying cycle as 07-08 (overleverage + bad collateral structure), but the inversion is that this time the “safe” collateral (Treasuries) is the leverage trigger, while the credit damage will land in consumer ABS and private credit.

Hedge funds are functionally holding Treasuries via interest rate swaps and repo leverage, just like foreign banks held MBS via dollar swaps in 2006. It's the same systemic pattern: 

The eventual crack won't begin with credit defaults; it'll begin with swap margin calls and repo liquidity shocks, and then it'll flow into the credit markets - especially personal loan ABS and private credit, which are downstream of that funding structure.

On October 23, 2025, South Korea issued $1.7B FX bonds for liquidity and confidence in the carry trade. Korea’s $1B USD + ¥110B yen issuance at tight spreads shows buyers willing to take Korean sovereign/agency risk and improve Korea's FX buffers. Easing local FX funding costs for Korean banks/corporates and helps stabilize regional dollar/yen funding markets in the near term.

For the yen carry specifically: large, well priced yen issuance (and generally tighter JPY yields) reduces immediate yen funding stress and can momentarily support carry trades funded in yen. But this all depends on BOJ policy and FX hedging costs - if BOJ tightens (or if world risk repricing strengthens yen), the carry reverses fast. 

Korea issuing FX bonds slightly reduces regional funding strains and gives one more source of FX liquidity - but it doesn't move the core risk: if the Treasury basis trade reverses, margin calls occur, and repo haircuts rise, the world funding plumbing can seize up and transmit stress rapidly into other asset classes.

South Korea’s $1.7B FX bond issuance helps regional FX liquidity and slightly eases some funding paths (including yen carry), but it doesn't neutralize the systemic risk the Fed flagged: massive, repo funded Treasury leverage booked in Cayman Islands. If those funds face margin calls, the expected outcome is a fast forced deleveraging and market wide liquidity shock that can cascade into personal loan ABS and private credit; outright legal defaults are possible but only in the most severe, rapid scenarios - typically the damage comes from the forced selling itself.

As of October 29, 2025 the Fed cut rates by ¼ bp, now at 3.75%, which reduces short-term funding costs, buying time for institutions to unwind voluntarily. While it calms things in the short-term, possibly reducing immediate margin pressures, repo and swap markets may ease slightly if participants believe liquidity is being supported. Funds and originators with near term maturities have more breathing room, refinancing risks to somewhat drop which could slow down the initial cascade of forced asset sales.

Lower policy rates give the impression of “cheap money”, which may lead funds to reenter levered positions (i.e. Treasury basis trades) or increase their size, raising the systemic buildup. That means when the unwind begins, it may be larger than if rates had stayed higher. While lower short-term rates can tighten the spread between funding and assets, making levered trades looks less risky at the moment. This creates a false sense of security - funding fragility still exists, but mark-to-market losses may be hidden until they blow up.

Many levered structures count on specific funding cost or spread cushion; when policy rates fall, the cushion shrinks (unless asset yields fall proportionately). If the yield on Treasuries or other collateral falls while funding lines become more crowded or haircuts rise, the leverage becomes more vulnerable. The cut may postpone the visible crack in funding markets, but the underlying plumbing remains the same. Because of the delay, the eventual unwind might hit a worse point (less liquidity, more crowded positions), making the cascade more severe.

The Fed cutting its rate to 3.75% doesn't remove the crisis path, instead it affords a little more time and reduces immediate pain for some participants. But it also encourages more leverage, compress risk spreads, and thins the funding cushion, making the eventual unwind potentially larger and more abrupt. In short: it's a postponement and enlargement rather than prevention. 

The SRF (Standing Repo Facility) is where eligible firms post collateral for overnight cash from the Fed. A spike utilization (especially at month end) indicates large quantities of collateral being pledged to meet cash needs or funding pressures. A record draw of $50.35B on October 31, 2025, suggests that funding stress is real and acute, even if not yet widespread. Month end flows often reflect liquidity management, but when the draw is this large it suggests structural pressure rather than just seasonal/timing effects.

Hedge funds in the Cayman Islands are estimated by the Fed to hold very large US Treasury positions via repo/basis trades. These trades rely on collateral (Treasuries) and short-term funding (repo, swaps), but if funding becomes constrained, these players must post more collateral or unwind leverage Treasury positions, which increase demand for cash and collateral.

Therefore, the SRF spike is consistent with the early stages of a funding/shock event: large collateral being posted in the leverage chain, likely some forced or precautionary funding flows. It suggests that the leverage chain is thinning, and that Treasury collateral users are reacting - either by prepping for margin calls or already seeing haircuts rise.

When funding/collateral stress hits at the Treasury level, the stress propagates like this: 

Thus the SRF spike is a leading liquidity indicator for the whole chain

It's not a full blown crisis, the large SRF usage indicates the cracks are forming. If this continues or gets larger (i.e. SRF draws climb $100B+ or repo haircuts widen >10bps), then the window for a rapid unwind is narrowing. The next stages to watch: bigger swelling in SRF + reverse repo, Treasury basis widening, repo GC spreads jump, ABS spread widening.

Now because SOFR has released its stress point to a mere 3.91%, it's staved off what will happen for the time being.

What we want to watch for next is the daily SRF and reverse repo usage figures (if they continue climbing), repo GC rates and SOFR-OIS spread (if they widen significantly), cash futures Treasury basis widening (unwinding of hedge fund positions), ABS bid ask spreads and warehouse financing line announcements (for personal loan ABS), and major fund/prime broker announcements of margin calls or reduced financing availability.

Doing this, you'll be more than prepared to hedge any downside risk, and allocate your portfolios and/or accounts to perform with positive growth.

For those who didn't read my last article, check it out called Economic Analysis (linked down below) where I describe private credit problems, economic comparisons, economic losses post 2008, personal loan crisis, asset backed securities, and the private credit connection.

Economic Analysis

Images are AI generated and in no way portray realistic situations or people, aside from the screenshots taken.

For more information email [email protected]