Planet Money: "How the Government Got Hedge Funded"

Original air date: October 10, 2025

Episode Overview

This episode explores how and why hedge funds now play a pivotal, sometimes unsettling, role in the U.S. Treasury market—the market at the heart of government borrowing and global finance. Through interviews with insiders (including a rare, candid hedge fund voice), the show traces the journey of government IOUs (Treasury bonds) from the safe, regulated world of federal auctions through Wall Street banks, ultimately into the hands of risk-hungry hedge funds. The hosts probe how this shift happened, what risks it brings, and what it means for taxpayers and future government bailouts.

Key Discussion Points & Insights

1. The Growing Gap and the Market for U.S. Debt

• Structural deficit: The government consistently spends more than it collects in taxes.
  • "There is a basic mismatch between how much our government takes in in revenue... and what it spends" (B, 00:47)
• Solution: Borrowing via Treasuries—federal IOUs that investors worldwide see as ultra-safe.
  • "The U.S. government's promise to pay back what it borrows plus interest. That is a Treasury. It's an IOU." (B, 01:24)
• Risks: Mounting federal debt means higher interest payments—now exceeding even defense spending.
  • "We're now spending more on the interest costs than we do on defense." (A, 02:16)

2. How the Treasury Market Works

• Auctions: The Treasury sells new bonds at regular, ritualized auctions designed for maximum predictability and stability.
  • "The treasury is a big safety first operation. They are laser focused on being as safe and boring as possible." (C, 05:41)
• Participants: Used to be mainly pension funds, insurance companies, sovereigns, and big banks called "primary dealers".
• Process: Bidders send in amounts and interest rates they're willing to accept; the Treasury chooses the lowest rates to minimize taxpayer costs.
  • "The goal: borrow as cheaply as possible so that... the US Taxpayer doesn't have to pay a ton of interest." (A, 06:02)

3. From Banks to Hedge Funds – The Shift

• Primary dealers (e.g., Goldman Sachs) purchase Treasuries, then resell them—to clients or on the open market.
• Collateral role: Treasuries serve not only as investments, but as the preferred collateral for banks and brokers in all kinds of financial transactions.
  • "The reason Treasuries are so good as collateral is because there are so many of them and because people are buying and selling them all the time." (C, 12:37)
• Regulatory changes: Post-2008 crisis, banks faced stricter risk limits, so the riskiest trades shifted into less-regulated hedge funds.

4. Hedge Funds’ ‘Treasury Basis Trade’ Explained

• Rise of hedge funds: With banks restrained, hedge funds stepped in—amassing huge positions in Treasuries via complex, highly leveraged trades.
• Treasury basis trade: Hedge funds buy Treasuries, borrow to fund those purchases (from money market funds), and simultaneously sell Treasury futures to make profit on tiny price differences.
  • "The trade Phil does is called the treasury basis trade. And the reason this trade has become so big... is because of the enormous amount of Treasuries out there now" (C, 16:46)
• Money market funds: They loan Hedge funds cash overnight, with Treasuries as collateral, to safely earn a return without holding long-term debt.
  • "Phil does these one day deals with money market Funds. He borrows their cash overnight, and then he lends them his Treasuries as collateral." (C, 17:54)
• Index funds’ needs: Hedge funds sell Treasury futures, letting large funds gain exposure to Treasuries in a ‘cheaper’, synthetic way.

5. Why This Arrangement Worries Regulators

• Leverage and systemic risk: This web of borrowing, lending, and trading is huge—about $800 billion at risk. In a crisis, everyone might scramble for cash or collateral.
  • "All these other hedge funds who are also doing this treasury basis trade, they all also borrowed money to do this trade as big as possible... about $800 billion tied up in this trade" (B, 21:07)
• 2020 Market blow-up: During the pandemic panic, this trade imploded; only aggressive Fed intervention stabilized the market.
  • "We bought close to $3 trillion worth of treasuries in March and April 2020 alone... to save many innocent people their livelihoods, you sometimes have to benefit those who are kind of less deserving of being helped." (A, 24:44)

6. The Moral Hazard Problem

• Bailout dynamic: When things go wrong, the government ends up saving hedge funds (and the broader system), encouraging risky behavior (moral hazard).

  • "Moral hazard is having the incentive to do things that make you better off by shifting risk onto society as a whole." (E, 26:36)

• Trade-offs (‘trilemma’): You can have safe banks, stable markets, or risk-takers, but not all three.

  • "You can have safe banks, stable markets or people taking real risks in the market, but you can't have all three." (C, 27:33)

Notable Quotes & Memorable Moments

• On the scale of the U.S. debt market:
  "Every other debt manager in the world wishes they had a government debt market like ours." (A, 01:50)

• On the mundane reality of Treasury auctions:
  "The only way you know you did a good job is if the auction came right around where the market expected... No surprises is a good day." (D, 13:32–13:40)

• On the money market ‘overnight’ cycle:
  "Phil does these one day deals with money market Funds. He borrows their cash overnight, and then he lends them his Treasuries as collateral." (B, 17:54)

• On potential crisis:
  "Each one of those bases has been taken apart into its pieces. And there's disorderly buying and selling and everything is washing back and forth." (E, 22:06)

• On Fed intervention and bailouts:
  "To save many innocent people their livelihoods, you sometimes have to benefit those who are kind of less deserving of being helped." (A, 24:44)
  "We need to get away from the idea that you're going to get bailed out if you're one of these investors." (A, 26:15)

Important Timestamps

• [02:16] – Interest on debt exceeds defense spending
• [05:41] – Inside the somber, safety-obsessed culture of Treasury auctions
• [09:49] – How Goldman Sachs (primary dealers) bid and manage risk
• [13:03] – Treasuries as key global collateral; need for deep liquid markets
• [16:46] – Phil Prince (Pine River Capital) explains ‘Treasury basis trade’
• [21:07] – Size of leveraged trades: $800 billion at risk
• [23:44] – The March 2020 'blow-up' and the Fed's $3 trillion intervention
• [26:36] – Defining “moral hazard"
• [27:33] – Trilemma: safe banks, stable markets, risk-takers—pick two

Episode Flow & Tone

• Language & Tone: Straightforward, witty, and occasionally playful (e.g., comparing futures to “eggs about to hatch”).
• Speakers: Clear attribution between hosts (Mary Childs, Kenny Malone), experts (Dilip Singh, Anshul Seagal, Phil Prince).
• Structure: Narrated journey from government auction rooms to Wall Street—and finally to hedge funds—highlighting both the benefits and new dangers facing the foundational market of the global economy.

Conclusion

This episode gives an engaging deep dive into the arcane but vital world of government debt markets, showing how regulatory shifts and financial innovation mean ordinary taxpayers are more entangled than ever with the risky bets of hedge funds. The big question: Can we have financial stability without guaranteeing a safety net for risk-takers—or is that just the cost of keeping our economy running?