Margin debt has climbed to 6.49% of M2, the broad US money supply measure — a level with no precedent in the modern history of financial markets. But what does it actually mean when investors borrow this heavily to buy stocks, and why did the last time something similar happened end so badly?

Margin debt is hitting record highs just as interest rates are climbing, the Federal Reserve has raised rates for the first time since 2023, and oil has already pushed past $100 a barrel. That combination may mean the conditions for a sudden, violent deleveraging are more advanced than markets are currently pricing in.

Leverage: the mechanism that amplifies everything, in both directions

Margin debt is the tool investors use to borrow money to buy securities, pledging the value of their own portfolio as collateral. In a favorable market, this structure amplifies returns on the capital actually put up: for the same move in the underlying asset, a leveraged investor earns a higher percentage return than one investing without borrowed money. The catch is that the mechanism works with the same symmetry in the opposite direction — and the fallout tends to arrive in a way that isn’t linear.

According to FINRA and Federal Reserve (FRED) data compiled by Valuation Rewind, the ratio of margin debt to M2 has reached 6.49%, an absolute peak with no precedent in the entire post-2008 financial crisis era. From 2008 through 2023, this indicator never came close to today’s levels, which would make the current scale of leverage in the US stock market structurally unprecedented for modern markets.

The foreign variable: a 60% foreign stake in US assets

Adding to the picture is a second, systemic dimension that’s often underweighted in public debate: non-resident investors’ participation in US financial assets has reportedly climbed to nearly 60% of the total, up from roughly 40% during the pandemic and about 25% during the 2008 crisis. That progression shows the pool of holders of US assets has become significantly more international — with direct implications for the stability of capital flows if a shock hits.

The combination of domestic leverage at record highs and the largest foreign exposure ever recorded creates a kind of systemic fragility that compounds on itself: if conditions turn, selling pressure could come simultaneously from margin investors scrambling for liquidity and from foreign holders repositioning their currency exposure. The result could be a faster, deeper price correction than traditional risk models are built to capture.

The Fed has raised rates: what changes for leveraged investors

Against this backdrop, the Federal Reserve raised its benchmark rate for the first time since 2023, bringing it to a range of 3.75%-4.00% on a unanimous vote that caught markets off guard with how united the restrictive signal was. That kind of unanimity is not a minor detail: it suggests the central bank isn’t grappling with internal uncertainty, and that further tightening can’t be ruled out. Fed funds futures are reportedly already pricing in a probability near 50% of another rate hike at the October meeting, while the FOMC’s own dot plot suggests a majority of members expect at least one more move by year-end.

For investors holding leveraged positions, higher rates translate directly into a higher cost of borrowing, eating into the economics of open positions. If asset prices used as collateral fall on top of that, a broker can issue a margin call — a formal demand to top up the account with additional cash or to have part of the portfolio forcibly liquidated. Forced selling pushes prices down, erodes the collateral of other leveraged investors, and triggers further margin calls: this feedback loop, known as deleveraging, has historically tended to unfold fast and disorderly.

The sector to watch

Simply put: stocks.

Analysis from Wells Fargo indicates that the average American investor’s equity allocation has climbed to 72% of their portfolio, the highest level since 1969. And in a market where almost no one is bracing for a pullback, the VIX — the index that tracks implied volatility on the S&P 500 — currently sits well below its historical average for the 1990-2025 period. Against a backdrop of record leverage, multi-year-high bond yields, persistent inflation pressure and elevated geopolitical tension, compressed volatility may not reflect an absence of risk so much as an absence of any perception of it.

So, where does that leave things

Record-high margin debt is not, on its own, a verdict on where markets are headed: extreme levels can persist for far longer than any analyst can reasonably predict, and there is no automatic mechanism that turns high leverage into an immediate crisis. What may be worth keeping in mind, though, is that when the turning point does arrive, it typically comes faster and hits harder than investors positioned for further gains expect. That is the recurring lesson of margin-debt cycles: historically, it hasn’t been the absolute level of leverage that did the damage, but the speed at which that leverage had to be unwound.

Editor’s note

This article was originally published in Italian on money.it by Tommaso Scarpellini on September 21, 2026 as «Debito a margine record e Fed hawkish. Siamo davanti alla “combo” più pericolosa del decennio?». It has been translated and adapted for an international audience by the Money.it International desk.