Another potential source of instability, even a crisis, is the repo market. It is at the center of what is known as the basis trade under which financial investors seek to make a profit from the tiny difference in the price of Treasury futures and their present price. The futures are sold, and Treasuries are bought to meet that trade. But the difference is tiny and in order to make a real profit, it must be repeated over and over with debt.

The Treasury bond that has been purchased can be used as collateral for an ultra-short-term loan from the repo market and used to buy another bond as more futures are sold. The result, as an analysis by the FT in April showed, can be that just $10 million may, through such leverage, support as much as $1 billion of Treasury purchases. The whole operation depends on the very low interest rate in the repo market where funds are borrowed. But if that rises because of a tightening of liquidity, the whole operation can unravel.

Such an occurrence took place in September 2019 and required a major intervention by the US Federal Reserve. At its meeting last month, the Fed recognized that strains were developing in the repo market and took action to increase liquidity by announcing that as of December, it would cease its quantitative tightening program, in which it wound down its holdings of US Treasuries. It may soon become a buyer again, injecting more money into the system. That action has eased the tensions that were building up. But any sudden or unexpected development within the US or in global markets could see them rapidly develop again, such is the knife edge on which the entire financial system is presently balanced.