C&B Notes

Margin Debt Reaches Historical High

The long-run expected value of a levered portfolio is zero.  Artificially low rates appear to have encouraged speculators to take on more margin debt than they had pre-crisis 2008.

Investors borrowed $384.4 billion against their investments in April, a 1.3% gain from the previous month and a 29% rise from the same month last year, according to the New York Stock Exchange.  That exceeds the record of $381.4 billion in debt held against investments, known as margin debt, from June 2007.  The rising level of debt is seen as a measure of investor confidence, as investors are more willing to take out debt against investments when shares are rising and they have more value in their portfolios to borrow against.

The latest rise has been fueled by low interest rates and a 16% year-to-date stock-market rally.  Some see the increase as a sign of speculation, particularly if the borrowed money is reinvested in stocks.  But advisers say that margin debt can be a cheaper and easier way to borrow than a traditional loan, so they are recommending margin borrowing for uses like home renovation and business expansion.