Cheap Capital Model Weakens as Highly Indebted Companies Face Refinancing Pressure

Weakening foreign capital inflows are increasing markets’ dependence on public intervention, which can ease tensions but cannot reverse lasting structural shifts. For companies, fragmented capital flows mean higher costs and less stable access to funding, according to Allianz Trade’s economic research.

Financial stability increasingly relies on public support

For four decades, foreign savings flowing into US assets helped underpin global financial stability. Those inflows supported low interest rates, supplied high-quality collateral and enabled the private sector to create liquidity across global markets.

That model is weakening as foreign demand for US Treasury securities declines. Federal Reserve intervention, and more recently action by the US Treasury, is increasingly taking its place. These measures help stabilise a highly leveraged financial system in which greater interest-rate volatility can trigger broad selling across risky assets.

The Fed’s first-generation tools managed excess liquidity

The first generation of tools was designed to let the Fed control short-term rates amid excess liquidity created by quantitative easing (QE). After the 2008 global financial crisis, QE was therefore supplemented with instruments intended to keep market rates within the designated range. The report describes interest on reserve balances (IORB) as the upper boundary and overnight reverse repurchase operations (ON RRP) as the lower one.

The toolkit also included the repurchase agreement facility for foreign and international monetary authorities (FIMA Repo Facility), alongside central-bank swap lines. These aimed to limit fluctuations in funding conditions and meet overseas demand for dollar liquidity during periods of stress.

The system’s effectiveness nevertheless depended on inflation remaining low. The Covid-19 pandemic fundamentally changed those conditions.

The Treasury’s newer tools address market disruption

A second generation of tools primarily aims to ease market strains during quantitative tightening (QT). The US Treasury has played an increasingly important role since the Silicon Valley Bank crisis in March 2023.

One major instrument has been increased Treasury bill issuance. Outstanding bills rose from approximately $3.8 trillion to $6.7 trillion as the government financed its deficit, rebuilt the Treasury’s cash balance and implemented its debt-management strategy. The increased supply also helped draw money out of the reverse repo facility, which held a record $2.6 trillion in April 2023.

The current toolkit is broader. Alongside the Fed’s Standing Repo Facility, it includes shorter maturities for newly issued debt, Treasury buybacks, measures easing pressure on bank balance sheets and the GENIUS Act.

In practice, the report characterises these actions as “indirect QE”. Reducing the amount of long-dated Treasuries available to private investors lowered ten-year yields by an estimated 25 basis points. This occurred despite the Fed’s quantitative tightening, although the term premium continued to rise.

The approach carries costs: higher long-term financing costs and a shorter average maturity of debt.

Structural forces are fragmenting the financial system

A declining share of global savings is reaching US capital markets. Countries that previously invested their surpluses there are directing more funding towards domestic defence, energy and industrial development. Reserve managers are also gradually reducing their portfolios’ dependence on the dollar.

Allianz Trade’s analysis identifies a changing foreign investor base in US government debt. Price- and yield-sensitive investors, frequently using leverage and operating through offshore financial centres, are becoming more important relative to central banks.

Capital flows into long-dated US Treasuries have consequently become more unstable. Their volatility has increased to approximately 3.7%, against an average of 2.6% since 2009. Treasuries are also increasingly falling alongside equities rather than offsetting stock-market losses and stabilising portfolios.

The report argues that US government debt is therefore gradually losing some of its safe-haven status. The growing co-movement of bonds and equities also deepens uncertainty over the inflation outlook.

Public intervention can buy time

Public institutions can reduce immediate market strains, but cannot reverse the forces fragmenting global finance. In the authors’ baseline scenario, continued fragmentation would bring higher bond term premiums, a gradually weaker dollar over the medium term, deeper domestic bond markets at the expense of international markets and a larger role for gold.

The central argument of Allianz Trade’s economic research is that the world is shifting away from a model based on global savings recycling and private liquidity creation. Government, central banks and administrative management of debt markets are playing a greater role. This can reduce short-term crisis risks without removing structural sources of instability.

Companies face more selective financing conditions

Although the report focuses on global financial stability, the shifts it describes also matter for companies. A transition from abundant, even excessive, global savings towards stronger competition for capital, greater rate volatility and restricted cross-border flows could make financing more expensive, less available and less predictable.

Rising funding needs for the energy transition, industrial policy, infrastructure and defence mean that more savings are being deployed domestically.

Fed and Treasury intervention can ease market strains and reduce the risk of a sudden disappearance of liquidity. It cannot restore the earlier environment of cheap, readily available capital. In an increasingly selective funding market, balance-sheet quality, cash generation, debt structure and maturity profiles become more important.

Highly indebted companies that refinance frequently, operate on low margins and hold limited liquidity buffers are most exposed. These mechanisms could raise refinancing difficulties and, indirectly, insolvency risk even for businesses whose operating performance does not deteriorate to the same extent.

Source: Allianz Trade economic research. Original Polish article, November 2, 2026. English editorial translation.