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Planet Money

How the government got hedge funded

with Dilip Singh, Anshul Sehgal, Phil Prince

Published October 10, 2025
View Show Notes

About This Episode

The episode explains how U.S. government debt is issued as Treasuries, how auctions work, and how primary dealer banks help distribute this debt. It then traces how hedge funds have become major players in the Treasury market via the "Treasury basis trade," using heavy borrowing and Treasuries as collateral, which can amplify risk. The hosts and guests discuss the March 2020 turmoil, the Federal Reserve's massive intervention, and the resulting moral hazard and policy trade‑offs between safe banks, stable markets, and allowing risk‑taking.

Topics Covered

Investing Federal bailouts Securities regulation Debt crisis Lender of last resort Hedge funds U.S. Treasury market Treasury basis trade Money market funds Moral hazard Financial stability

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Quick Takeaways

  • The U.S. government funds the gap between tax revenue and spending by issuing Treasuries, which are seen globally as extremely safe and are sold through frequent, highly structured auctions.
  • Primary dealer banks like Goldman Sachs are obligated to bid in Treasury auctions and aim for predictable, surprise‑free outcomes that keep borrowing costs low and markets calm.
  • Treasuries are not only long‑term investments but also the core collateral in global finance, prized for their depth and liquidity and often used to back risky trades.
  • Hedge funds have increasingly entered this market via the Treasury basis trade, borrowing enormous sums (on the order of hundreds of billions of dollars) to arbitrage differences between cash Treasuries and Treasury futures while meeting other institutions' needs.
  • When markets became highly stressed in March 2020, the Treasury basis trade blew up, and the Federal Reserve stepped in to buy close to $3 trillion of Treasuries, effectively backstopping hedge funds and others.
  • This dynamic creates moral hazard: risk‑takers may assume they will be bailed out in crises, encouraging them to hold less rainy‑day cash and take larger, more dangerous positions.
  • Policymakers face a three‑way trade‑off: they can have safe banks, stable markets, or lots of private risk‑taking, but the episode argues they cannot have all three simultaneously.
  • Hedge fund participation helps the government borrow more by absorbing Treasury supply, but it also makes market stability increasingly dependent on the behavior and robustness of lightly regulated actors.

Podcast Notes

Introduction: U.S. government borrowing and the Treasury market

Structural mismatch between U.S. government revenue and spending

Government spends more than it collects in taxes on items like defense, Medicare, and infrastructure[1:17]
• Spending categories mentioned include defense, Medicare, and roads "and that sort of thing"
Gap is financed by borrowing in international bond markets[1:29]
• People and institutions with money lend to those who want money in return for periodic interest payments

What Treasuries are and why they are popular

A Treasury is the U.S. government's IOU: a promise to pay back borrowed money plus interest[1:41]
• Treasuries are seen as one of the safest assets because the U.S. is rich and has basically always paid its debts
Treasuries are in constant demand globally[2:01]
• Quote from Dilip Singh: "Every other debt manager in the world wishes they had a government debt market like ours"

Double-edged sword of a huge, liquid Treasury market

Benefits and risks of a deep, liquid market

Dilip Singh describes the U.S. Treasury market as the deepest, most liquid market in the world but notes this also means a lot of debt[2:20]
• He says the U.S. is now spending more on interest costs than on national defense
Large debt load puts U.S. fiscal finances at risk because others hold the debt[2:42]
• The U.S. does not generally control who holds its debt and is subject to their "whims"

Interest rates are determined by investors, not the government

Investors collectively decide how much interest the U.S. must pay to borrow[2:51]
• If investors soured on Treasuries and sold them en masse, it would create a big problem for U.S. finances

Rise of hedge funds as major Treasury buyers

Economists, regulators, and academics debate the growing role of hedge funds in the Treasury market[3:02]
• Hedge funds are described as loosely regulated, risk-taking firms investing money for people rich enough to lose it
Concern that hedge funds bring "hedge fundy" risk attitudes to the Treasury market[3:37]
• If these new players take reckless risks and cause a mess, U.S. taxpayers will likely bear the cost
• A voice comments: "I think there is something wrong. If Main Street's bailing out Wall Street in those moments."

Planet Money hosts introduce the episode's focus

Host introductions and framing

Mary Childs and Kenny Malone introduce themselves as the hosts[4:04]
They describe the U.S. government debt market as the most important market in the world[4:06]
• All of global finance relies on the safety and stability of this market

Guiding question of the episode

They ask whether we should worry that more Treasuries are going to hedge funds[4:17]
They preview that they will follow how an IOU from the federal government ends up with hedge funds and interview a hedge fund manager in person[4:32]

Inside the U.S. Treasury: How auctions work

Culture and environment at the Treasury Department

Dilip Singh describes selling new Treasuries at the U.S. Treasury, usually in a suit and tie[5:57]
• The Treasury is portrayed as a "big safety-first operation" focused on being safe and boring
Borrowing cheaply is the core goal[6:41]
• The less risk investors perceive, the lower the interest the U.S. must pay over the life of the loan
Maintaining investor calm and trust is key[6:49]
• Dilip notes the building is full of people in dark blue and gray suits, providing investors an experience "just like the one they had last time"

Who traditionally buys Treasuries

Traditional investors include pension funds, insurance companies, rich individuals, sovereign wealth funds, foreign central banks, and individual investors[7:10]
Treasury sells debt via auctions and needs them to operate smoothly with no surprises[7:22]

The auction room and daily process

Dilip recalls a special auction room with 1970s-style orange and brown carpets in need of an upgrade[7:42]
• He emphasizes the room is designed for "quiet, disciplined execution", not creativity
Only a small, consistent group (around 15 people) is authorized in the room during auctions[8:02]
• He says there are never strangers in that room, and it is so quiet you could hear a pin drop during an auction
Auctions are frequent and routine[8:28]
• There are auctions every week, usually Tuesday, Wednesday, and Thursday, because the U.S. has so much debt to issue

Mechanics of Treasury auctions

Weekly borrowing announcement and bidding

The week starts with an announcement of how much the Treasury will borrow, e.g., $100 billion[8:44]
• The key question to the market: who wants to lend the U.S. money and at what interest rate?
Investors specify interest rates for different maturities[8:53]
• They indicate what interest they require to lend for three months, five years, ten years, etc.
Bids are submitted shortly before the auction closes[9:11]
• Investors submit bids 30 to 60 minutes before each auction closes, stating quantities and desired interest rates
• Historically bids were written with pencils; now they are typed into a computer box by 1 p.m.

Transition from Treasury to primary dealer banks

The narrative moves to a trader at an investment bank, specifically Goldman Sachs[9:38]
Introduction of Anshul Sehgal at Goldman Sachs[9:42]
• He jokes about wearing a collared shirt because he was being interviewed, instead of his usual band t-shirts

Role of primary dealers like Goldman Sachs

Special relationship between primary dealers and the U.S. government

Goldman Sachs is one of 25 primary dealers that have a special deal with the U.S. government[10:14]
• The government wants to ensure it can always get loans when issuing Treasuries
Primary dealers receive perks in exchange for obligations[10:14]
• They must always submit real, good-faith bids at Treasury auctions

Anshul's job and how he evaluates success

Anshul decides how much Goldman wants to lend and at what interest rate for each auction[10:34]
• For example, he might bid for a 10-year loan at 4.1% interest, with higher rates for longer loans "within reason"
Auctions reveal market sentiment in real time[10:53]
• At 1 p.m. the system closes and within 30-120 seconds the results come back, making the period tense for traders
• Anshul calls the auction a "clearing event" where, briefly, everyone can see how risk-averse or risk-seeking the market is
A good day is an auction with no surprises[11:43]
• He says a primary dealer did a good job if the auction outcome was right around where the market expected it to be

Treasuries as tradable assets and collateral

Distribution of new Treasuries after auctions

Around 1:02 p.m., the Treasury publishes auction results and allocates bonds to bidders at or below the winning interest rate[12:02]
• New Treasuries go to investors including Goldman and Anshul, but he often quickly resells them
Anshul acts as a facilitator, moving Treasuries into the wider market[12:18]

Different ways Treasuries are used

Some investors buy Treasuries to hold for safety and interest income[12:37]
Others trade them actively like stocks and bonds[12:40]
Treasuries are widely used as collateral for risky trades[12:44]
• Example: a trader wanting to bet heavily that a company's stock will plummet must post collateral before a broker will accept the bet
• Treasuries are ideal collateral because they are plentiful and easily traded, even in large amounts

Liquidity and the "virtuous circle"

Anshul notes the Treasury market is the largest collateral market in the world[13:40]
For Treasuries to function as collateral, they must be nearly as good as cash[13:53]
• Being nearly as good as cash depends on how easy and cheap it is to trade them
More trading activity makes Treasuries more liquid and trusted, which encourages still more trading[13:53]

Shift from regulated banks to hedge funds in the Treasury ecosystem

Bank regulation after the 2008 financial crisis

After 2008, rules tightened because banks had taken excessive risks and damaged the global economy[14:50]
• Regulations restricted bank activities, limiting how much risk they could take and how much they could buy
Banks serve essential societal functions[14:50]
• Functions mentioned: holding savings and deposits, making loans to businesses
Risk pushed out of banks seeks other outlets[14:50]
• The hosts note that markets are made of people looking for opportunities, so when you "squish" risk out of one area, it reappears elsewhere

Hedge funds step in and start buying Treasuries

Hedge funds have grown as buyers of Treasuries, with differing views on whether this is stabilizing or destabilizing[14:58]
• Some argue hedge funds may threaten stability; others say they help the government borrow more; the episode considers both views

Inside a hedge fund: Phil Prince and the Treasury basis trade

Introducing hedge fund manager Phil Prince

Phil Prince is a partner and head of Treasury at Pine River Capital Management[17:28]
Phil is unusual among hedge fund managers for dressing more formally and agreeing to speak on the record in an NPR studio[17:33]
• He describes wearing a blue button-down, gray wool slacks, and business shoes on a very hot day
Many hedge funds declined to discuss their Treasury activities on the record; Phil agreed[18:00]

Phil's general approach: solving others' problems

Phil says he identifies needs in the market and gets paid to help others accomplish what they need to do[18:15]

What is the Treasury basis trade?

Phil labels his core strategy the "Treasury basis trade"[18:22]
The trade has become large because of the enormous volume of Treasuries outstanding[18:27]
• There is $29 trillion of Treasuries in the global market, up from $17 trillion at the start of 2020
The U.S. government must sell Treasuries to primary dealers like Goldman, who then need to place them with clients[18:43]
Phil buys Treasuries and uses them to solve other institutions' specific problems[18:53]

How hedge funds use Treasuries with money market funds

Money market funds' needs

Money market funds hold clients' cash that might be needed at any time[19:14]
• They want to earn interest but must keep investments short-term because clients may demand their money back quickly

Overnight deals between Phil and money market funds

Phil borrows cash overnight from money market funds and lends them Treasuries as collateral for one day at a time[19:33]
• He repeats this daily: borrowing cash, buying Treasuries, and lending them out as collateral
Host challenges why money market funds don't just buy Treasuries directly[19:46]
• Phil explains these are often seven-year Treasuries, while money market funds only "think about tomorrow" and need quick access to cash

How hedge funds use Treasuries with index and retirement funds

Index and retirement funds' constraints

Many large index and retirement funds must hold Treasuries because they are a growing part of the overall market[20:26]
• These funds aim to resemble the market composition while also trying to beat performance benchmarks
Treasure holdings can drag performance[20:38]
• Treasuries are "relatively unprofitable" versus riskier assets and thus don't help fund managers outperform peers

Phil's solution: Treasury futures ("eggs")

Phil suggests such funds can buy Treasury futures instead of cash Treasuries[21:08]
• A Treasury future is a promise to buy a Treasury at a specific price in the future
Benefits of using futures for these funds[21:46]
• Upfront cost is lower than buying the bond today, yet they can still effectively "check the box" of holding Treasuries
• The hosts liken futures to "eggs" that will hatch into bonds in the near future; Phil personally thinks of them as forward bonds
Phil views selling futures as meeting the needs of funds that must show Treasury exposure[21:56]

Leverage, scale, and systemic risk in the Treasury basis trade

Financing the basis trade with borrowing

Phil and other hedge funds borrow large amounts from money market funds to scale the trade[22:34]
• Phil stresses he must execute at minimum cost; otherwise competitors will undercut him
All major hedge funds doing this trade are similarly borrowing heavily[22:42]
Estimated size of the Treasury basis trade[22:42]
• The trade's size is about $800 billion when combining Phil's money, borrowed funds, and competitors' positions

What happens if Treasury markets become unstable?

Regulators and others worry about a scenario where the previously stable Treasury market becomes volatile[23:02]
• Concerns center on what happens if prices jump around suddenly and violently
Phil describes potential scramble for cash and collateral[23:33]
• In stress, everyone would try to get their money or Treasuries back
• Treasuries can be pledged repeatedly as collateral, making it hard to trace who ultimately controls them
Disorderly markets could cause sharp price swings[23:59]
• Phil says each "basis" position could be broken into pieces, leading to disorderly buying and selling
• Disorderly trading manifests as "jumpy" prices; if prices fall, Treasuries used as collateral are suddenly worth less than expected

Phil's risk management versus others'

Phil says he carefully calculates potential losses in a bad scenario and holds enough cash to withstand such a storm[24:32]
He acknowledges he cannot be sure whether peers have done similar risk calculations or kept adequate cash[24:37]

March 2020: When the Treasury basis trade blew up

Market panic at the start of the COVID-19 pandemic

In March 2020, as the pandemic began, markets were falling and investors were panicking, desperately seeking cash[25:07]
The Treasury basis trade "totally blew up" in that period[25:13]

Phil's experience during the turmoil

Asked how it felt, Phil says it was painful because he was losing money[25:19]
• He also saw it as a huge opportunity, provided he had enough cash to avoid bankruptcy and later make back losses and more
He declines to say whether he ultimately profited, citing SEC rules about discussing returns[25:41]
• He confirms he did not go bankrupt, since he is "still here"

Federal Reserve intervention to stabilize the market

The episode notes that in a way hedge funds were not allowed to go bankrupt because the Federal Reserve intervened massively[25:49]
• The Fed jumped into the market, buying Treasuries to stabilize the system and benefit hedge funds, dealers, and fund managers
Dilip Singh's role at the New York Fed during the crisis[26:14]
• Dilip says he was on the front lines at the New York Fed and that they bought close to $3 trillion worth of Treasuries in March 2020 alone
Rationale for the massive intervention[26:48]
• Dilip describes the action as necessary to prevent thousands or tens of thousands of needless bankruptcies
• He warns that without intervention there could have been another "lost decade" of unemployment with serious psychological, political, and geopolitical consequences
• He frames the intervention as choosing the "least worst" option amid no good choices

Benefits and risks of hedge fund participation in the Treasury market

How hedge funds help the U.S. government borrow

The U.S. government benefits from hedge funds buying Treasuries because this participation allows it to borrow more[27:05]

Concerns about lightly regulated actors in a systemically important market

Hedge funds are less regulated than primary dealer banks like Goldman Sachs[27:19]
• Unlike primary dealers, hedge funds have no special relationship or obligations to the government
Hedge funds do not consider market stability their responsibility[27:30]
• However, their actions matter for stability and thus for the government's ability to fund itself and function
The Treasury market's functioning was premised on being boring and safe, but now depends in part on hedge funds having good days[27:40]

Dilip Singh on bailouts and investor expectations

Dilip says investors of all kinds with different objectives are welcome, and it's fine if they make a lot of money[27:51]
He argues society needs to move away from the idea that such investors will be bailed out when things go wrong[28:00]

Moral hazard and policy trade-offs

Defining moral hazard in this context

Phil defines moral hazard as having incentives to make yourself better off by shifting risk onto society[28:12]
• In moral hazard situations, decision-makers do not bear the consequences of their risky actions; the rest of society does

How bailouts encourage risky behavior

The hosts say moral hazard may lead less careful hedge funds to conduct the basis trade with insufficient cash buffers[28:27]
• If investors expect to be bailed out, they have less incentive to calculate how much "rainy day" cash to hold
• Such expectations can push them to choose the riskiest, most profitable trades

Policy options and the structural "deal"

The government could regulate hedge funds more or choose to borrow less[28:47]
If policymakers want hedge funds to continue absorbing Treasuries so the government can borrow more, they likely must be prepared to bail them out in crises[28:56]
• The hosts characterize this as the structure that has been built, intentionally or not

Three-way trade-off: safe banks, stable markets, and risk-taking

The episode concludes with the claim that you can have safe banks, stable markets, or people taking real risks in the market, but not all three at once[29:14]

Credits and acknowledgments (non-promotional)

Production and special thanks

The episode was produced by Willa Rubin and edited by Marianne McCune, fact-checked by Sierra Juarez, and engineered by Jimmy Keeley and Sina Lafredo[29:41]
Alex Goldmark is noted as the executive producer[29:45]
Special thanks are given to Jeffrey Mellie at NYU Stern for the trilemma framing and to several academics mentioned by name[29:45]

Lessons Learned

Actionable insights and wisdom you can apply to your business, career, and personal life.

1

Systems that appear safe and boring, like the U.S. Treasury market, often rely on complex relationships between actors with very different incentives and risk appetites, so understanding the full chain of interactions is crucial before assuming stability.

Reflection Questions:

  • • Where in your own work or finances are you relying on a system you assume is "safe" without really understanding who the key players are and what motivates them?
  • • How could mapping out the chain of counterparties and incentives in one important decision you're making change how you assess its risk?
  • • What is one system you depend on (financial, organizational, or personal) that you could take time to diagram this week to better understand where fragility might be hiding?
2

When risk is regulated out of one part of a system, it tends to migrate elsewhere, so effective risk management requires looking at the whole ecosystem rather than just tightening rules on the most visible actors.

Reflection Questions:

  • • In your organization or life, where have you seen problems "pushed" from one area to another instead of being truly solved?
  • • How might broadening your lens from a single department, product, or account to the whole system change the way you design controls or safeguards?
  • • What is one constraint or rule you rely on that might be inadvertently shifting risk or workload onto someone else, and how could you uncover and address that?
3

Heavy use of leverage can make otherwise small pricing differences profitable, but it also magnifies losses and can create systemic vulnerabilities if many players use similar strategies.

Reflection Questions:

  • • Where are you effectively using "leverage"-whether financial, time, or reputational-to amplify your results, and do you clearly understand the downside if conditions change suddenly?
  • • How would your current portfolio, project mix, or career plan look if you stress-tested it against a severe but plausible shock similar to March 2020?
  • • What is one leveraged bet you are making right now (explicitly or implicitly) that you could resize or hedge to avoid catastrophic loss while still pursuing upside?
4

Expectations of rescue or bailout-moral hazard-encourage people to underprepare for bad outcomes, so robust planning requires assuming you will bear the consequences of your own risks.

Reflection Questions:

  • • In what areas of your life or business are you subconsciously assuming that someone else will cushion your downside if things go wrong?
  • • How would your risk-taking change if you assumed no external help-no employer bailout, no family support, no central bank rescue-was coming in a crisis?
  • • What additional buffers (cash reserves, skills, relationships, or contingency plans) could you build over the next six months so you can better absorb a shock without depending on others to save you?
5

There are real trade-offs between safety, stability, and aggressive risk-taking; trying to maximize all three at once is unrealistic, so you must decide which dimensions you prioritize and design accordingly.

Reflection Questions:

  • • Looking at your own goals, where would you place yourself on the spectrum between safety, stability, and bold risk-taking, and is your current behavior aligned with that choice?
  • • How could explicitly naming the trade-offs in an upcoming strategic decision (e.g., growth vs. resilience, speed vs. control) clarify what you and your stakeholders truly value?
  • • What is one area-investing, career moves, or business strategy-where you can intentionally dial risk up or down to better match the kind of "trilemma" balance you actually want?

Episode Summary - Notes by Phoenix

How the government got hedge funded
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