Margin debt, or the amount that has been borrowed by investors from banks or brokers in order to pay for US securities, reached a grand total of $379.5 billion in March – the second highest in history. The highest level was $381.4 billion back in July 2007 .
The problem is that large amounts of borrowing, on average about 50% of the equity position can exacerbate losses as the market starts to fall as investors rapidly sell down positions.
In addition, high levels of margin debt can often result in volatile markets as investors are faced with losing more than they can afford.
For example, this article by zerohedge highlights this comment made by JP Morgan: ‘We also note that peaks in margin debt are usually followed with a sharp market correction’.
The piece goes on to suggest:
‘….we think that the quick increase of net margin debt, and high ratio of margin debt to S&P 500 do point to an increased probability of a market correction and volatility increase in the second half of the year.’
The article explains the situation in more depth, however, the overriding theme is be careful in the current market environment.
If the market starts to correct, the current high level of margin debt could make the whole situation worse.