Alongside its warning that the Western economy is being carried by an AI bubble, the Bank for International Settlements used its Annual Economic Report, released June 28, to flag a second, quieter danger: the entanglement of record government debt with highly leveraged hedge funds.
Funds running “basis trades” and similar strategies—buying government bonds while shorting the related futures, financed by short-term repo borrowing—have become major intermediaries in the very markets governments depend on to roll over their debt. The BIS warns that this leverage, piled atop public debt at multi-decade highs, leaves sovereign bond markets prone to “sharp and sudden” price swings: if the funds are forced to unwind in a stress, the selling feeds on itself—precisely where central banks have the least room to act.
It is the disease EIR has long named: a system in which speculation is built upon speculation while the productive economy that should anchor it is starved of credit. The AI bubble is the loud symptom; the leverage knotted into the government-bond market may be the one that seizes first.