At the beginning of August, the stock market in the usa experienced a severe decline. In a financial stability report released on Friday, the Federal Reserve pointed out that high-leverage hedge funds rapidly sold off assets in an environment of insufficient liquidity, which was one of the main reasons for the dramatic fluctuations in the us stock market in August.

The report shows that as of the first quarter of 2024, the average leverage ratio of hedge funds has reached or approached the highest level since 2013. The combination of high leverage and insufficient market liquidity amplified market shocks, leading to extreme fluctuations in the stock market.

The Federal Reserve wrote in the report that institutions rapidly sold their positions to meet internal volatility targets, rather than due to margin calls from banks. The Federal Reserve added:

"During this period, the liquidity in the us treasury market and other markets deteriorated significantly, but after favorable data was released the following week, market conditions improved rapidly.

Nevertheless, this incident again illustrates that high leverage can amplify adverse shocks."

Despite warnings about high-leverage hedge funds, the Federal Reserve remains optimistic about the overall risks to the financial system, stating that, overall, banks "are still robust and resilient." Most domestic banks in the usa hold a large amount of liquid assets, and their reliance on uninsured deposits has also decreased.

In the report, the Federal Reserve also expressed concerns about other aspects. For instance, the Federal Reserve's contacts on Wall Street are worried about the sustainability of the usa's debt burden, especially as the Treasury has to continue issuing more government bonds to pay off debts. The Federal Reserve warned that

This may exert upward pressure on long-term interest rates, thereby further suppressing economic growth and putting pressure on sovereign and private sector borrowers.

In addition, concerns about inflation and rising long-term interest rates have been replaced by worries about escalating geopolitical tensions. The Federal Reserve wrote in the report that this could lead to a "sudden risk aversion," resulting in declines in asset prices and losses for affected companies and investors, including those in the usa.

Editor/Lambor