U.S. equity funding markets remain stretched in the wake of last month's spike in short-term borrowing costs, as near-record stock prices and a frenzy over popular technology shares fuel demand for leverage. Concerns center on the equity repurchase or repo market, where investors and traders borrow short-term cash against stock holdings. Ahead of the June quarter-end, financing costs in that market surged as demand for leveraged equity exposure intensified. The cost of financing equity positions climbed to roughly 200 basis points above the federal funds rate on June 26, Morgan Stanley data show, the highest since December 2024.
While those costs have since fallen by more than half to 89 basis points, according to another metric that has a quarterly maturity, market participants say the forces that drove rates sharply higher remain in place - including the proliferation of leveraged exchange-traded funds that have been snapped up by traders eager to play hot sectors such as semiconductors.
