WEBVTT - Josh Younger Explains Why the Bond Market Has Been So Volatile 0:00:10.000 --> 0:00:13.240 Hello, and welcome to another episode of the All Thoughts Podcast. 0:00:13.280 --> 0:00:19.240 I'm Tracy Allaway and Joe. What's more volatile than cryptocurrencies 0:00:19.320 --> 0:00:25.560 at the moment. I don't know if this is a 0:00:25.560 --> 0:00:27.720 trick question, because I think there are a number of things, 0:00:27.960 --> 0:00:31.840 but one thing that most people didn't expect up until 0:00:31.840 --> 0:00:35.040 recently was bonds, US government bonds. I don't think they've 0:00:35.040 --> 0:00:38.559 been it is volatile. Is cryptocurrencies? What they have been volatile? Now, 0:00:38.600 --> 0:00:41.519 wait a second, there was a day where they actually 0:00:41.760 --> 0:00:45.120 were more volatile than bitcoin at least, and I think 0:00:45.159 --> 0:00:48.160 it was It was earlier this month after the Wall 0:00:48.159 --> 0:00:51.040 Street Journal released that article saying that the FED might 0:00:51.240 --> 0:00:54.959 hike rates by basis points right, and suddenly we had 0:00:55.000 --> 0:00:57.640 this big move in bond yields and I think the 0:00:57.680 --> 0:01:00.880 tenure U S Treasury the yield on jump something like 0:01:00.920 --> 0:01:03.960 twenty eight basis points in a day, which was I know, 0:01:04.040 --> 0:01:08.160 you love this a four standard deviation move and the 0:01:08.240 --> 0:01:10.720 kind of thing that's only supposed to happen based on 0:01:10.800 --> 0:01:13.680 normal distributions, Like once in a century have you ever 0:01:13.680 --> 0:01:17.360 seen that tweet about this seemed to leave breaking through 0:01:17.400 --> 0:01:21.200 the wall like the cool man? Have you? Like every 0:01:21.240 --> 0:01:25.679 time someone says standard deviation, I'm not surprised. I'll find 0:01:25.680 --> 0:01:27.640 it for you. Thank you. There's a really funny tweet 0:01:27.640 --> 0:01:29.760 about it. Anyway, I will say that was a wild day. 0:01:29.760 --> 0:01:32.400 I remember that Nick timorrose at the Washer journals and 0:01:32.480 --> 0:01:36.200 they're gonna go instead of fifty and everyone believed them 0:01:36.560 --> 0:01:40.360 and right, and it was just this huge instant repricing 0:01:40.400 --> 0:01:43.200 of the entire curve, like really shocking, right, And so 0:01:43.319 --> 0:01:45.880 a four standard deviation move, make of that what you will. 0:01:46.000 --> 0:01:49.040 But bitcoins like move in the same period was something 0:01:49.080 --> 0:01:52.520 like two point seven standard deviations. So we're talking about 0:01:52.760 --> 0:01:56.240 the market for US treasury debt, which is one of 0:01:56.240 --> 0:01:59.880 the most probably the most important market in the world. 0:02:00.200 --> 0:02:04.080 It's basically the risk free asset against which all other 0:02:04.200 --> 0:02:06.960 assets are judged, and it's supposed to be the most 0:02:07.040 --> 0:02:10.520 liquid market in the world as well, And yet it's 0:02:10.600 --> 0:02:14.040 having these big moves. And this isn't the first time, right, 0:02:14.080 --> 0:02:15.840 you know, I said a move that's only supposed to 0:02:15.840 --> 0:02:18.639 happen once in a century, But actually we see these 0:02:18.680 --> 0:02:21.440 moves relatively often. And of course we had the big 0:02:21.480 --> 0:02:24.880 blow up in yields in March. We had a big 0:02:25.000 --> 0:02:28.440 rally in yields, and I think it was. We've had 0:02:28.600 --> 0:02:32.400 numerous other high profile incidents where the market just seems 0:02:32.440 --> 0:02:36.560 to like go nuts in extreme periods of alatility. We 0:02:36.639 --> 0:02:40.200 do see this stress and it's it's not supposed to happen, right, Like, 0:02:40.240 --> 0:02:42.160 that's the whole idea here, which is that there are 0:02:42.200 --> 0:02:44.880 certain financial assets where yeah, it's supposed to happen, kind 0:02:44.919 --> 0:02:50.040 of with treasuries because they're theoretically risk free, and because 0:02:50.160 --> 0:02:53.760 say they can theoretically be you know, theoretically from an 0:02:53.760 --> 0:02:56.799 economic standpoint, be like equivalent to reserves or almost like 0:02:56.840 --> 0:03:00.520 cash at some point, the ultimate safe haven asset, uh asset. 0:03:01.160 --> 0:03:03.760 They're supposed to just be that, like the one, the 0:03:03.840 --> 0:03:06.760 one predictable thing, the son of the you know, the sun, 0:03:07.000 --> 0:03:11.240 around which the financial universe revolves around, and everyone's in 0:03:11.240 --> 0:03:14.280 a while, it doesn't happen, and that's not good. Yes, 0:03:14.480 --> 0:03:17.240 not good is a good way of putting it. The 0:03:17.320 --> 0:03:19.640 other thing that's happening at the moment is the FED 0:03:19.720 --> 0:03:22.920 has started to unwind its massive balance sheet, right yeah. No, 0:03:23.080 --> 0:03:25.960 So it's like I get another factor here, right, um, 0:03:26.000 --> 0:03:28.680 And that actually happened. I think they started unwinding in 0:03:28.720 --> 0:03:30.919 the same week where they raised interest rates by seventy 0:03:30.960 --> 0:03:33.320 five basis points, so of course no one actually noticed 0:03:33.639 --> 0:03:36.840 that this had started. But there's all these things going 0:03:36.880 --> 0:03:39.240 on in the market. It seems like we keep getting 0:03:39.280 --> 0:03:41.440 these dramatic events, so we really we need to dig 0:03:41.440 --> 0:03:43.240 into it, don't we do it? All right, we do 0:03:43.320 --> 0:03:46.000 actually have the perfect person to discuss. We are going 0:03:46.040 --> 0:03:48.760 to be speaking with Josh Younger. He is currently a 0:03:48.800 --> 0:03:53.280 managing director and Global head of Asset Liability Management, Research 0:03:53.320 --> 0:03:56.600 and Strategy at JP Morgan. He was previously doing cell 0:03:56.720 --> 0:03:59.960 side research at JPM, writing about interest rates and money market. 0:04:00.000 --> 0:04:02.120 It's which I think was the last time we had 0:04:02.160 --> 0:04:04.400 him on and I didn't know this, but he was 0:04:04.480 --> 0:04:09.400 previously an astrophysicist, studying things like black holes and what 0:04:09.520 --> 0:04:12.760 happens when large objects collide against each other. So maybe 0:04:12.800 --> 0:04:16.159 the perfect analogy for the bond market. Perfect, all right, Josh, 0:04:16.240 --> 0:04:19.240 thank you so much for coming on. All thoughts, Thanks 0:04:19.320 --> 0:04:21.000 very much for having it. It's great to be back. 0:04:21.600 --> 0:04:25.359 So maybe just as a as a beginning question, I 0:04:25.400 --> 0:04:29.080 think people have probably heard that there may be liquidity 0:04:29.240 --> 0:04:32.000 issues in the U S. Treasury market, or certainly there 0:04:32.000 --> 0:04:35.040 are these bouts of volatility, but could you maybe give 0:04:35.080 --> 0:04:39.039 us some color of what exactly we mean when we 0:04:39.120 --> 0:04:42.360 talk about liquidity in the treasury market and what exactly 0:04:42.440 --> 0:04:45.280 happens on a day like the one we saw recently 0:04:45.640 --> 0:04:49.080 where ten year yields made this massive move. Yeah, so 0:04:49.600 --> 0:04:51.400 I know it's it's always weird to see a four 0:04:51.440 --> 0:04:54.600 standard deviation event, but if people were around, we had 0:04:54.600 --> 0:04:57.599 a fifteen standard deviation event at least over a short 0:04:57.600 --> 0:05:00.080 time scale. So, pulling in my old education, that's not 0:05:00.120 --> 0:05:03.000 supposed to happen in the lifetime of the universe. So, uh, 0:05:03.160 --> 0:05:07.720 standard deviations have their place. But you know, the normal assumption, 0:05:07.760 --> 0:05:10.920 the Bell curve assumption, is not always necessarily the best one. 0:05:10.920 --> 0:05:13.520 And for treasury markets in particular, you know what people 0:05:13.560 --> 0:05:15.160 like to say that there are lots of fat tails, 0:05:15.240 --> 0:05:18.640 like like unfrequent things happen at a much higher frequency 0:05:18.680 --> 0:05:21.160 than you or otherwise expect. That's true of all financial markets. 0:05:21.000 --> 0:05:24.680 It's definitely true bond markets. But the question when we 0:05:24.680 --> 0:05:27.720 bring up liquidity is if we look at big changes 0:05:27.720 --> 0:05:31.680 in price, is that because things have really changed, or 0:05:31.760 --> 0:05:35.440 is it because there's some kind of market functioning or 0:05:35.720 --> 0:05:38.080 other issue that is causing the price change to be 0:05:38.120 --> 0:05:42.839 exacerbated for reasons other than fundamentals. So, uh, this is 0:05:42.839 --> 0:05:45.279 a tough environment because you know the ft is actually 0:05:45.360 --> 0:05:48.240 raising rates by seventy five basis points in a meeting, 0:05:48.360 --> 0:05:52.320 So the outlook is truly changing rapidly, and so rapid 0:05:52.360 --> 0:05:55.960 price changes would be expected just because you know the 0:05:56.200 --> 0:05:59.279 fundamentals are shifting at the same pace. But we do 0:05:59.320 --> 0:06:03.000 want to figure out out and watch if the market 0:06:03.040 --> 0:06:05.599 is unable to transfer risk, because that's kind of what 0:06:05.600 --> 0:06:08.160 the markets supposed to do. This was a lineup buyers 0:06:08.160 --> 0:06:11.080 and sellers and take care of those bonds that don't 0:06:11.120 --> 0:06:13.560 have an immediate buyer but have an immediate seller vice versa. 0:06:13.640 --> 0:06:17.800 Like they're supposed to smooth out these fluctuations by by 0:06:17.960 --> 0:06:20.880 having somebody in the middle. It's a market maker who's 0:06:20.920 --> 0:06:22.880 the buyer to the sellers and the seller to the buyers, 0:06:22.920 --> 0:06:24.919 and and can hold onto stuff that doesn't have an 0:06:24.920 --> 0:06:27.360 immediate home. It's just basically running a store, right like 0:06:27.480 --> 0:06:30.120 you're running a candy store. You've got inventory, you have 0:06:30.320 --> 0:06:33.080 orders coming in, you've got customers coming in. You need 0:06:33.120 --> 0:06:35.040 shell space, but you also need to make sure you 0:06:35.080 --> 0:06:37.120 have enough customers to take out the inventory you're getting 0:06:37.160 --> 0:06:38.640 in so you need to line all those things up, 0:06:38.640 --> 0:06:40.720 and unfortunately, when you're a market maker, you can't really 0:06:40.760 --> 0:06:43.520 control your inventory right that someone else's decision as opposed 0:06:43.520 --> 0:06:46.640 to the candy store. But there are different ways to 0:06:46.640 --> 0:06:49.120 to look at this um Usually we talked about the 0:06:49.160 --> 0:06:51.920 depth of the market, which is if you look at 0:06:51.920 --> 0:06:55.080 the screen. You're a trader on a desk and any 0:06:55.160 --> 0:06:59.280 given dealer and you looked at the screen electronic markets 0:06:59.520 --> 0:07:02.360 between dealers where they put up you know, I'm willing 0:07:02.360 --> 0:07:04.359 to buy this much at this price or sell this 0:07:04.480 --> 0:07:07.360 much at that price. How much size could you move 0:07:07.960 --> 0:07:09.960 near the current price in the market. That's the market 0:07:09.960 --> 0:07:14.960 depth that's really low. So that's immediately concerning because if 0:07:15.080 --> 0:07:17.120 depth is low, that means if I go to sell 0:07:17.200 --> 0:07:20.240 something that's bigger than the size on the screen, presumably 0:07:20.280 --> 0:07:22.160 the price is going to change. And if that size 0:07:22.160 --> 0:07:24.640 on the screen is really small, then an incrementally larger 0:07:24.680 --> 0:07:27.360 trade still small in the grand scheme of things, is 0:07:27.360 --> 0:07:29.200 going to move the price a lot. And the implication 0:07:29.360 --> 0:07:33.360 is the market can't transfer risk without a big price impact. 0:07:33.920 --> 0:07:37.680 So that's that's really important before moving on from that 0:07:38.360 --> 0:07:42.400 on market depth. So okay, like Nick Timorrose comes out 0:07:42.440 --> 0:07:46.200 and says they're gonna go. Of course you would expect 0:07:46.280 --> 0:07:48.760 to see a big move because there is fundamental news. 0:07:48.840 --> 0:07:51.440 There's a reason for the price of the curve to change. 0:07:51.440 --> 0:07:53.760 Is markets digest the sort of new thing about the 0:07:53.800 --> 0:07:57.000 fed trajectory. But as you say, it's like, okay, that's 0:07:57.000 --> 0:07:59.840 gonna happen. How do you measure depth? What would be 0:08:00.000 --> 0:08:02.760 sort of normal or healthy depth? Like, how would you 0:08:02.840 --> 0:08:06.360 quantify that? And then what is the quantification of depth? 0:08:06.640 --> 0:08:09.880 Right now? When the when the dealers look at their screen. 0:08:10.240 --> 0:08:13.440 So we're data limited here because there's there's really two 0:08:13.600 --> 0:08:16.880 kinds of markets that exist in something like a hubb 0:08:16.880 --> 0:08:20.320 and spoke or a network. The first is the net 0:08:20.480 --> 0:08:23.680 the the end users, right, so the holders of treasury bonds. 0:08:23.680 --> 0:08:25.080 It could be a foreign central bank, it could be 0:08:25.080 --> 0:08:28.480 an asset manager, a hedge fund. But the non dealer, 0:08:28.560 --> 0:08:32.360 non bank end users of bond debt, so they just 0:08:32.400 --> 0:08:35.320 hold it as an investment or a speculative asset. And 0:08:35.360 --> 0:08:38.120 then and that market faces the dealers because when you 0:08:38.160 --> 0:08:39.960 go to sell that bond or by another bond, you 0:08:40.000 --> 0:08:42.439 call up your dealer, right, So there's there's an interface 0:08:42.480 --> 0:08:45.240 there that is not particularly observed, but we don't really 0:08:45.240 --> 0:08:47.720 know what's going on there. Usually people call that voice trading, 0:08:47.800 --> 0:08:50.800 which is really like in the institutional market, I would 0:08:50.880 --> 0:08:53.400 call up my dealer and say I need to sell 0:08:53.440 --> 0:08:56.400 you a billion of tenure notes like big trades, big 0:08:56.440 --> 0:09:00.520 institutional trades, and when retail gets smaller sizes, usually there's 0:09:00.559 --> 0:09:03.640 some institution standing between them and the dealers, and then 0:09:03.679 --> 0:09:06.680 there's the market between the dealers themselves. And in this 0:09:06.760 --> 0:09:08.800 context dealer we'll talk about. I'm sure that the h 0:09:08.880 --> 0:09:11.880 f T component of this the high frequency component, but 0:09:11.920 --> 0:09:15.720 like the injured dealer, market is the way that dealers 0:09:15.720 --> 0:09:18.600 pass frists around between each other, and in some sense 0:09:18.640 --> 0:09:21.040 that's the more important market because if you think of 0:09:21.080 --> 0:09:23.319 yourself as buying whatever someone is selling, and selling whatever 0:09:23.320 --> 0:09:25.079 someone is buying, the amount of size you're willing to 0:09:25.120 --> 0:09:27.760 show that the size trade you're willing to do is 0:09:27.800 --> 0:09:29.840 informed by how easily and cheaply you can hedge that. 0:09:30.080 --> 0:09:32.320 So the way I like to think about this, and 0:09:32.320 --> 0:09:34.280 I'll get to your question in a second, the way 0:09:34.280 --> 0:09:35.920 to think about this is you've got sort of risk 0:09:36.000 --> 0:09:38.680 coming in from the outside, and users selling a bond, 0:09:38.720 --> 0:09:41.240 for example, say they're selling a billion of those tenure notes, 0:09:41.800 --> 0:09:43.480 They're going to call one or two dealers, not gonna 0:09:43.480 --> 0:09:45.960 call everybody. Those one or two dealers are going to 0:09:46.000 --> 0:09:48.280 buy that debt at some price, and they're gonna try 0:09:48.320 --> 0:09:50.839 to hedge it. And what hedging really is is socializing 0:09:50.880 --> 0:09:55.400 that slug of risk across the broader complex of dealers. 0:09:55.679 --> 0:09:57.120 So they're all going to keep a piece of it, 0:09:57.559 --> 0:09:59.440 but they're not going there. One dealer is not going 0:09:59.480 --> 0:10:02.040 to hold the whole billion outright, there's too much risk 0:10:02.120 --> 0:10:04.520 to hold as a market maker. Yields move a little bit, 0:10:04.880 --> 0:10:06.840 all of a sudden, you've run through all of your capital, 0:10:06.840 --> 0:10:08.880 and that's a problem. So the active hedging is the 0:10:08.920 --> 0:10:11.000 act of taking pieces of that and spreading it around. 0:10:11.240 --> 0:10:13.920 And that's what the inter dealer market does. That's the 0:10:13.960 --> 0:10:17.560 electronic market that trades much more frequently. It's a decent 0:10:17.640 --> 0:10:21.520 chunk of the overall volume traded, but it's almost entirely 0:10:21.559 --> 0:10:25.439 concentrated in recently issued bonds. Broke a text by part 0:10:25.440 --> 0:10:28.480 of the biggest venue for that UM. And that's where 0:10:28.520 --> 0:10:31.360 we have good data because it's electronic, so we can 0:10:31.400 --> 0:10:33.720 see the screens, so to speak, UM and we can 0:10:33.800 --> 0:10:36.240 capture that data, and we can look at, say the 0:10:36.920 --> 0:10:41.120 the total number of bids and offers within say two 0:10:41.120 --> 0:10:43.160 to three levels of the best price. This is the 0:10:43.200 --> 0:10:46.320 central limited order book. People call them CLOBs um, which 0:10:46.520 --> 0:10:48.920 is always kind of a fun acronym, but they can 0:10:48.960 --> 0:10:53.200 track that and say within three levels of the best price, 0:10:53.240 --> 0:10:56.120 there is x million dollars on the screen to trade 0:10:56.240 --> 0:10:59.040 on average during say the New York trading session. When 0:10:59.040 --> 0:11:00.760 you do that, on average something like a hundred and 0:11:00.760 --> 0:11:03.280 fifty million. Over long periods of time, for the past 0:11:03.280 --> 0:11:05.920 ten years, that's averaged something like a hundred and fifty 0:11:06.040 --> 0:11:08.520 two hundred millions, so that would be sort of typical 0:11:09.320 --> 0:11:12.760 and bad times that can go down to five to 0:11:12.840 --> 0:11:16.000 ten that's what we had in Now it's probably around 0:11:16.000 --> 0:11:18.559 fourty or fifty million on average. Now this fluctuates a 0:11:18.600 --> 0:11:20.080 lot over the course of the trading day, but this 0:11:20.160 --> 0:11:21.959 is like if you were to close your eyes and 0:11:22.000 --> 0:11:23.800 then you know, pick a time and look at it, 0:11:23.880 --> 0:11:26.760 you get something like forty million to trade within three 0:11:27.280 --> 0:11:30.880 levels of the best price. So that's low um. The 0:11:30.920 --> 0:11:33.600 reason why that's important again is because that's that's the 0:11:33.840 --> 0:11:37.360 liquidity available to the dealers themselves to hedge their risk, 0:11:37.400 --> 0:11:39.120 and so if that number gets higher, they're willing to 0:11:39.120 --> 0:11:42.120 make bigger markets facing clients. If that number gets smaller, 0:11:42.120 --> 0:11:44.800 they're willing to get make smaller markets because they don't 0:11:44.800 --> 0:11:46.560 have confidence that they can hedge out of the risk. 0:11:46.920 --> 0:11:51.360 So that's low along the lines of different volatility episodes 0:11:51.400 --> 0:11:53.680 we've seen in the past. So if this was August, 0:11:54.320 --> 0:11:56.560 it would be probably a similar number. If this was 0:11:57.000 --> 0:12:00.640 June or July the Taper tantrum, you get similar numbers 0:12:00.640 --> 0:12:04.160 of that UM. March of twenty was much lower UM. 0:12:04.200 --> 0:12:07.719 In November of two it was much lower UM. So 0:12:07.920 --> 0:12:10.520 you know, it's been worse, but it's definitely not not 0:12:10.600 --> 0:12:29.800 great out there. Can we talk a little bit about 0:12:29.880 --> 0:12:32.360 March because I think that was when we first had 0:12:32.360 --> 0:12:35.600 you on and we were talking about this big sell 0:12:35.679 --> 0:12:38.640 off in the bond market, which was exactly what people 0:12:39.400 --> 0:12:42.360 didn't expect to happen when we had a huge risk 0:12:42.400 --> 0:12:46.040 off event which was the global pandemic and equities sliding 0:12:46.080 --> 0:12:49.640 and all of that. What exactly is the consensus around 0:12:49.800 --> 0:12:54.720 what happened in March of what was the issue that 0:12:54.720 --> 0:12:58.080 that whole incident exposed. So it's funny, I think if 0:12:58.120 --> 0:12:59.800 if memory stars I was supposed to talk about live 0:12:59.880 --> 0:13:02.480 or form. We talked about and I think we eventually did, 0:13:02.520 --> 0:13:04.680 like a few months later, but it like we did 0:13:04.760 --> 0:13:09.000 ye more interesting events intervened. Yeah, so this brings up 0:13:09.040 --> 0:13:12.000 a really important question, which is a liquidity versus market functioning, 0:13:12.520 --> 0:13:14.920 Like what was so much worse back then? Because the 0:13:14.960 --> 0:13:17.320 FED is unwinding their balance sheet, like you said, they're 0:13:17.320 --> 0:13:19.520 not buying three trillion dollars worth of assets over a 0:13:19.520 --> 0:13:22.760 few weeks were three trillion rather, so there's clearly a 0:13:22.800 --> 0:13:25.440 lot less sense of urgency about the impact of this 0:13:25.520 --> 0:13:29.600 illiquid episode versus the events of and And that's where 0:13:29.640 --> 0:13:31.360 I think we should be very specific about what we 0:13:31.400 --> 0:13:36.320 mean by liquidity, because what we really mean we're always 0:13:36.320 --> 0:13:38.760 feeling around. This is the different people feeling different parts 0:13:38.760 --> 0:13:41.560 of the elephant. But like once a trunk wins, one's 0:13:41.559 --> 0:13:43.400 of one's a foot, but they don't really know the 0:13:43.440 --> 0:13:45.120 whole picture. I think if we were to have the 0:13:45.200 --> 0:13:48.960 full the full picture of the market, all the participants 0:13:49.480 --> 0:13:53.480 and all of their risk tolerance and positioning, and we 0:13:53.520 --> 0:13:56.640 would really be asking this question, can I sell when 0:13:56.640 --> 0:13:59.280 there's more sellers and buyers? How much does it move 0:13:59.320 --> 0:14:03.760 the price? Um and The implication there is can I 0:14:03.800 --> 0:14:07.120 turn my treasuries into cash at a reasonable cost in 0:14:07.120 --> 0:14:09.960 a reasonable period of time at scale. And that's not 0:14:10.080 --> 0:14:13.079 just part of the fact that the treasury market is 0:14:13.080 --> 0:14:15.280 perceived as risk free and is quite large. It's built 0:14:15.320 --> 0:14:18.679 into a lot of the law. The the liquidity coverage 0:14:18.760 --> 0:14:21.640 ratio does not distinguish between treasuries and cash. I'm not 0:14:21.680 --> 0:14:24.120 a lawyer, but there's I believe a part of the 0:14:24.160 --> 0:14:25.760 I R. S Code that says you can actually pay 0:14:25.760 --> 0:14:28.520 your taxes in treasuries, which is the only financial asset 0:14:28.560 --> 0:14:32.360 you can directly pay your taxes in. So like a 0:14:32.440 --> 0:14:34.480 chart list would say, well then their money, right, And 0:14:34.520 --> 0:14:37.720 so treasuries have special status and lots of different ways. 0:14:38.200 --> 0:14:40.880 The reason they do is because it's supposed to be 0:14:41.200 --> 0:14:43.800 as close to cash as any financial asset can be. 0:14:44.360 --> 0:14:46.040 And that means I can move large size at low 0:14:46.080 --> 0:14:48.080 cost because when you when you turn your bank account 0:14:48.080 --> 0:14:51.200 into physical cash, they don't charge you a fee, right, 0:14:51.240 --> 0:14:54.160 So so I need something that's convertible into into real currency. 0:14:54.640 --> 0:14:58.080 The low cost and back in not only was depth low, 0:14:58.200 --> 0:15:00.040 but the bid esque spread in the market was a 0:15:00.240 --> 0:15:02.240 wide So what's going on now is the depth is low, 0:15:02.280 --> 0:15:04.680 but if you're able to trade, you're able to trade 0:15:04.680 --> 0:15:06.600 it roughly the biddest spread you were able to trade 0:15:06.600 --> 0:15:10.040 out a year ago, especially in benchmark issues like the 0:15:10.040 --> 0:15:14.480 tenure note back, it was three, four or five times wider. 0:15:14.720 --> 0:15:17.680 So there were no bids or offers within three levels 0:15:17.720 --> 0:15:19.960 of that market price. In fact, the market price if 0:15:19.960 --> 0:15:22.360 you don't have bids or offers within one or two 0:15:22.440 --> 0:15:24.200 ticks of the market price, then it's not really the 0:15:24.200 --> 0:15:26.360 market price. We don't really know where the market price is. 0:15:26.480 --> 0:15:29.600 And so back then market the market was not functioning, 0:15:29.640 --> 0:15:33.040 it was not just a liquid and that's where the 0:15:33.160 --> 0:15:35.520 urgency comes in. So the question is what's different now 0:15:35.640 --> 0:15:40.240 versus ben What's going on now is a revision to expectations. 0:15:40.280 --> 0:15:44.000 But more importantly, this is an environment that's served familiar 0:15:44.000 --> 0:15:46.680 in certain respects. You know, we've had inflation before, not recently, 0:15:46.720 --> 0:15:48.680 but we've had it before. We know what it is, 0:15:48.760 --> 0:15:51.160 we know why the Fed is raising rates, We have 0:15:51.560 --> 0:15:54.560 reasonable confidence around the range of potential outcomes. Will argue 0:15:54.560 --> 0:15:56.400 about where the Fed is going to stop, but we 0:15:56.440 --> 0:15:58.760 know they're going to keep raising rates until inflation comes down, 0:15:58.800 --> 0:16:00.960 and we can say three four percent, five percent but 0:16:01.560 --> 0:16:05.120 I don't think anyone's out there calling for fun trade. 0:16:05.160 --> 0:16:06.880 So these are with thein the bounds of things we've 0:16:06.920 --> 0:16:10.320 seen before. Back in it's so easy to forget just 0:16:10.480 --> 0:16:15.200 how crazy the set of uncertainties was. And like, for example, 0:16:15.600 --> 0:16:17.720 there was speculation they would just close the market for 0:16:17.760 --> 0:16:20.880 some indeterminate period of time. Right, so if the markets closed, 0:16:20.920 --> 0:16:23.280 the bidst spread is infinite because you can't transact, So 0:16:23.320 --> 0:16:25.640 if you need cash, you need to get it now. 0:16:26.120 --> 0:16:28.440 So like that creates a lot of urgency. So just 0:16:28.480 --> 0:16:32.440 going back to March for a second, and as you 0:16:32.520 --> 0:16:37.080 laid out nicely, like the law basically says treasuries are 0:16:37.160 --> 0:16:39.920 cash or very close to cash or cash like and 0:16:39.920 --> 0:16:42.760 should be treated as such. But if I recall, like 0:16:42.840 --> 0:16:46.200 with Mar, part of the issue, and part of the 0:16:46.240 --> 0:16:48.920 reason we saw these sort of extreme widening of the 0:16:48.960 --> 0:16:52.280 spread is that even though there's theoretically free money on 0:16:52.360 --> 0:16:55.680 the table for someone to come in and close these spreads, 0:16:55.720 --> 0:16:58.840 that the demand for like pure cash was so strong 0:16:59.160 --> 0:17:03.280 that nobody, no actors in any any part of the ecosystem, 0:17:03.280 --> 0:17:05.560 whether it's edge funds or banks or whatever, wanted to 0:17:05.640 --> 0:17:09.280 deploy capital, deploy balance sheet to close these spreads to 0:17:09.280 --> 0:17:12.639 take advantage of these opportunities at scale. And so is 0:17:12.680 --> 0:17:14.800 the problem or is there sort of like a core 0:17:14.880 --> 0:17:18.280 problem with Yes, we want to treat treasuries is cash, 0:17:18.520 --> 0:17:20.439 but the way we have the system set up is 0:17:20.480 --> 0:17:24.600 such that we still depend on the risk taking appetite 0:17:24.640 --> 0:17:29.880 of private investors to actually do that job in the end. Yeah, 0:17:29.920 --> 0:17:31.960 so this gets to, you know, what are these dealers 0:17:31.960 --> 0:17:33.639 actually doing? And I was I was referring to, you know, 0:17:33.720 --> 0:17:37.040 matching buyers and salaries is one function, and holding inventories 0:17:37.080 --> 0:17:40.119 the other. I'm gonna reference the SLR, the Supplementary Leverage Ratio, 0:17:40.119 --> 0:17:42.280 because it's one example of a regulation that creates a 0:17:42.359 --> 0:17:44.920 very different set of incentives for dealers that are has 0:17:45.040 --> 0:17:48.760 within banks. And what the SLR does is it makes 0:17:48.800 --> 0:17:52.080 all balance sheet count the same towards your capital requirements. 0:17:52.080 --> 0:17:55.320 It makes balance sheet to scarce commodity. And that's not 0:17:55.359 --> 0:17:58.800 necessarily a problem if it's not strictly binding, or or 0:17:58.840 --> 0:18:01.960 there's relatively too a flow meaning as many buyers as sellers, 0:18:01.960 --> 0:18:04.840 but in a one sided market where there's mostly sellers, 0:18:04.840 --> 0:18:06.760 and that's what you're referring to, the most people want cash. 0:18:06.840 --> 0:18:10.240 They don't want securities. It makes it very difficult for 0:18:11.359 --> 0:18:14.840 a dealer that's housed within a bank to hold that 0:18:14.880 --> 0:18:18.320 inventory because what what what balance sheet constraints do, what 0:18:18.440 --> 0:18:21.600 leverage constraints do, is they turn that allocation of balance 0:18:21.600 --> 0:18:23.920 sheet into a zero sum game. So when the treasury desk, 0:18:23.960 --> 0:18:26.359 for example, wants to buy that billion dollars for the 0:18:26.359 --> 0:18:29.400 tenure notes, and they are near their allocation limit. Because 0:18:29.400 --> 0:18:31.000 if you want to limit the amount of balance sheet 0:18:31.000 --> 0:18:32.840 of business uses, you just gave it everyone a limit 0:18:32.960 --> 0:18:35.120 like that's a plausible way to do it. So that 0:18:35.119 --> 0:18:38.120 that creates rigidities. And let's say they call up their manager, 0:18:38.119 --> 0:18:39.440 and they call their manager and it goes all the 0:18:39.440 --> 0:18:40.920 way up to chain. They say, I need another five 0:18:40.960 --> 0:18:43.960 billion of balance sheet because there's so many sellers. And 0:18:44.000 --> 0:18:46.600 I'm the treasury desk, I'm I'm I'm processing the most 0:18:46.800 --> 0:18:49.240 important market in the world, right, so I need I 0:18:49.320 --> 0:18:52.359 need that extra balance sheet. The reaction as well. So 0:18:52.440 --> 0:18:54.639 does the prime business, so does the credit business, so 0:18:54.720 --> 0:18:57.919 does the front end business, the short term credit desk, 0:18:58.040 --> 0:19:02.160 so does the corporate lending business where you're drawing a revolvers. 0:19:02.160 --> 0:19:05.600 So everyone's got their hand out, and that's a zero 0:19:05.600 --> 0:19:07.040 sum game in the sense that like there is a 0:19:07.040 --> 0:19:09.399 balancie allocation that the firm can use, and it it 0:19:09.440 --> 0:19:13.600 makes it very hard in practice, especially at a high frequency, 0:19:13.600 --> 0:19:16.760 like a high pace, things were moving quickly to get 0:19:16.800 --> 0:19:18.760 those allocations where they need to be when they need 0:19:18.800 --> 0:19:21.480 to be there. If you think back to that period 0:19:21.520 --> 0:19:24.680 of time, it's easy with hindsight to say, well, you 0:19:24.720 --> 0:19:26.560 know there wasn't that much selling, but you don't know that. 0:19:26.600 --> 0:19:28.639 In the moment um. It's like driving a car three 0:19:28.680 --> 0:19:30.760 hundred miles an hour towards a towards the wall with 0:19:30.760 --> 0:19:33.840 your eyes closed and like it might work out, but 0:19:34.160 --> 0:19:37.280 like it might not, and that creates a lot of hesitation. 0:19:37.400 --> 0:19:41.320 So you have what's referred to as the dash for cash, 0:19:41.320 --> 0:19:47.160 but it's really about a relative urgency to find liquid assets, 0:19:47.200 --> 0:19:51.240 not securities, not long term securities, due to this concern 0:19:51.320 --> 0:19:53.359 that one you might need that cash for something, and 0:19:53.400 --> 0:19:56.800 too they might close the market tomorrow. That's the background. 0:19:56.840 --> 0:19:58.679 I think the important thing to keep in mind as well, 0:19:58.680 --> 0:20:02.359 and I think we talked about this back. There was 0:20:02.400 --> 0:20:06.280 this push over several years to take those market making 0:20:06.320 --> 0:20:09.760 functions and in parts, split them into two parts, and 0:20:09.800 --> 0:20:12.440 push them out of the banking sector. Now this wasn't purposeful, 0:20:12.480 --> 0:20:14.479 but that was the set of incentives ever created, so 0:20:14.520 --> 0:20:17.400 that when you think about matching buyers and sellers, high 0:20:17.400 --> 0:20:20.239 frequency traders took on a lot of that responsibility, and 0:20:20.280 --> 0:20:24.160 they did that by doing very very high frequency, fast 0:20:24.240 --> 0:20:27.280 arbitrage trades to try to spread the risk around really 0:20:27.359 --> 0:20:30.280 quickly and go home with no inventory. So high frequency 0:20:30.280 --> 0:20:33.000 traders generally don't have inventory at the end of the day, 0:20:33.000 --> 0:20:35.760 so they're doing only matching like that's that's that's most 0:20:35.760 --> 0:20:39.680 of their function and they were of that on screen depth, 0:20:39.960 --> 0:20:42.719 so they were the majority of the market, but they 0:20:42.760 --> 0:20:45.640 can't operate in a high volatility environment, so they tend 0:20:45.680 --> 0:20:47.879 to The thing about h f T s it tends 0:20:47.880 --> 0:20:51.280 to actually back away if something big is happening, right 0:20:51.320 --> 0:20:54.080 like if there's a big data release, like often the 0:20:54.119 --> 0:20:56.879 machines will kind of back away from making that market 0:20:57.000 --> 0:20:59.879 until things settle down a bit. Yeah, like that at 0:20:59.880 --> 0:21:01.879 the time, if you were to if you were to 0:21:01.920 --> 0:21:04.200 look at the way the market trades in the three 0:21:04.200 --> 0:21:08.760 seconds before the payrolls number drops on monthly Fridays, and 0:21:08.800 --> 0:21:11.639 look at any day any period of that two weeks span, 0:21:12.000 --> 0:21:13.800 and just how the market is trading like it felt 0:21:13.800 --> 0:21:17.800 like payroll Friday at eight thirty all day long for 0:21:17.920 --> 0:21:19.840 two weeks. And the reason is because if you're a 0:21:19.880 --> 0:21:22.000 higher concentrator, you're trying to make those bit esque spreads. 0:21:22.040 --> 0:21:24.200 You need to sell for a dollar and and and 0:21:24.359 --> 0:21:26.200 buy it back for a little less and so like 0:21:26.320 --> 0:21:28.560 if if market markets are moving around a lot, it's 0:21:28.600 --> 0:21:30.680 really hard to monetize the spread. So there's a reason 0:21:30.760 --> 0:21:34.240 for this, but in making it more complicated and costly 0:21:34.320 --> 0:21:37.159 for bank dealers to perform that market making function. In 0:21:37.320 --> 0:21:40.320 businesses like treasuries, the h f T s stepped in 0:21:40.359 --> 0:21:43.160 to fill that need like a life finds away moment. 0:21:43.760 --> 0:21:45.919 So they step and fill the fill the need. They 0:21:45.920 --> 0:21:47.879 do a great job until things get dicey, and then 0:21:48.200 --> 0:21:50.359 that business model does not operate well when vall is 0:21:50.440 --> 0:21:52.960 very high, so they tended to jump and and and 0:21:53.119 --> 0:21:56.040 drop the size they're willing to show. Can you talk 0:21:56.080 --> 0:21:59.440 a little bit about the overall size of the treasury 0:21:59.520 --> 0:22:02.680 market as well, because we have seen the US deficit growing. 0:22:03.119 --> 0:22:05.760 I think the amount of treasuries outstanding is at something 0:22:05.840 --> 0:22:09.520 like twenty three trillion dollars at the moment, and it's 0:22:09.560 --> 0:22:12.639 gotten a lot larger in recent years. Even though the 0:22:12.760 --> 0:22:16.680 FED has been purchasing US treasuries up until recently, how 0:22:16.720 --> 0:22:20.280 does that impact ease of trading or the way the 0:22:20.359 --> 0:22:24.119 market functions. Well, the FED helps a lot when they 0:22:24.160 --> 0:22:27.480 buy half of the net supply for the past two years. 0:22:27.840 --> 0:22:29.840 So there's been sort of two things going on there. 0:22:29.880 --> 0:22:33.320 The first is the FED is really there too absorb 0:22:33.400 --> 0:22:36.840 the supply, uh. And the second is the commercial banking sector, 0:22:37.600 --> 0:22:39.280 which I believe is the sixth or seven of the 0:22:39.359 --> 0:22:41.120 US commercial banking sector, which I think is the six 0:22:41.200 --> 0:22:43.760 or seventh larger largest holder of treasuries, has been the 0:22:43.760 --> 0:22:46.840 second largest buyer over the past two years. And that's 0:22:46.880 --> 0:22:49.000 because when you grow the size of the banking system, 0:22:49.000 --> 0:22:52.119 which is what KILLI quantitative easing does, there's this natural 0:22:52.200 --> 0:22:56.000 need to find assets to support those new deposits. There's 0:22:56.040 --> 0:22:59.560 new liabilities, and so banks have stepped into to absorb 0:22:59.600 --> 0:23:01.920 a lot of supply, and there's a bunch of other 0:23:02.000 --> 0:23:04.760 components in the market that that do sort of take 0:23:04.840 --> 0:23:08.200 on a decent share of it. But the question is more, 0:23:09.240 --> 0:23:15.480 is the market too big for the intermediation capacity offered? 0:23:15.960 --> 0:23:18.800 I would argue that's probably still the case it's certainly grown, 0:23:18.920 --> 0:23:23.840 if anything, and and bank appetites to market making treasuries 0:23:23.960 --> 0:23:28.280 is not concreased. But that introduced vulnerabilities. So just because 0:23:28.320 --> 0:23:30.680 that ratio is a little off doesn't mean the whole 0:23:30.720 --> 0:23:32.399 world is going to fall apart at any moment. But 0:23:32.520 --> 0:23:34.840 when the stress hits, which is what happened in twenty, 0:23:35.400 --> 0:23:39.440 it really struggles to serve that function. And that sort 0:23:39.560 --> 0:23:42.439 brings up the second thing that that non bank dealers 0:23:42.480 --> 0:23:44.240 were doing, which is on the hedge front side. We 0:23:44.280 --> 0:23:47.119 probably talked in at the time about basis trades and 0:23:47.880 --> 0:23:53.240 and specifically holding securities levered with repo, so levered longs 0:23:53.400 --> 0:23:57.239 in treasury securities that were hedged with futures positions. There 0:23:57.400 --> 0:24:00.359 was a big position that built up over time. Cause 0:24:00.920 --> 0:24:02.879 if balance sheet, again is a scarce commodity, it's a 0:24:02.920 --> 0:24:04.639 zero sum game, then you have to sort of use 0:24:04.680 --> 0:24:07.320 it or lose it as a client. And one way 0:24:07.400 --> 0:24:10.760 to do that is to have positions that utilize a 0:24:10.800 --> 0:24:12.840 repo line. You're sort of using your line of credit, 0:24:13.240 --> 0:24:15.560 but you're hedging the risk in the futures market, and 0:24:15.600 --> 0:24:17.600 so you're not actually taking any market risk, but you're 0:24:17.680 --> 0:24:21.480 using your allocation, which looks a lot like holding inventory. 0:24:21.640 --> 0:24:23.240 What dealers tend to do is they tend to be 0:24:23.359 --> 0:24:25.800 long off the run securities off the run securities or 0:24:25.800 --> 0:24:27.560 bonds that were issued a little while ago. They're not 0:24:27.640 --> 0:24:30.800 the most recently issued security. That's what long term holders 0:24:30.840 --> 0:24:32.400 tend to have, like stuff that was issued a while 0:24:32.400 --> 0:24:34.639 ago when they sell it. Deals hold that inventory, and 0:24:34.680 --> 0:24:36.720 they hedge in the futures market. On the hedge fund side, 0:24:36.800 --> 0:24:39.680 there was a position that built up which was pretty passive, 0:24:40.200 --> 0:24:43.359 mostly designed to use it rather than lose it on 0:24:43.480 --> 0:24:45.560 balance sheet, and that looked a lot like inventory. And 0:24:45.640 --> 0:24:49.560 so you have these two functions of matching trades performed 0:24:49.600 --> 0:24:52.320 by h f t s and holding inventory performed by 0:24:52.359 --> 0:24:56.000 hedge funds. That was a brittle arrangement because it was 0:24:56.000 --> 0:24:59.400 basically taking the market making capacity and allocating it away 0:24:59.440 --> 0:25:03.320 from banks to relatively unregulated institutions who are not subject 0:25:03.359 --> 0:25:06.359 to the SLR, for example. And what happens in that 0:25:06.400 --> 0:25:09.920 whole system comes crashing down because of a variety of 0:25:10.000 --> 0:25:14.240 operational and market related concerns that basically make it untenable 0:25:14.359 --> 0:25:18.119 to hold those basis positions and very difficult to operate 0:25:18.200 --> 0:25:22.120 a high frequency trading operation. And so you have all 0:25:22.200 --> 0:25:25.679 of this intermediation capacity that's in principle provided by non banks, 0:25:26.240 --> 0:25:29.920 all of a sudden disappears, and if when the banks 0:25:29.960 --> 0:25:32.160 are asked to take on the slack, they simply can't 0:25:32.160 --> 0:25:34.040 do it for a reasonable price, which is why this 0:25:34.080 --> 0:25:35.960 whole arrangement came to be in the first place, and 0:25:36.080 --> 0:25:39.119 so the market stops functioning. Can I just ask, is 0:25:39.200 --> 0:25:42.040 this sponsored repo? So this is just repo in general? 0:25:42.840 --> 0:25:45.440 Some of it sponsored sponsored repo is definitely worth talking 0:25:45.480 --> 0:25:48.280 about in terms of some of the solutions that are 0:25:48.520 --> 0:25:52.040 proposed to this issue of intermediation capacity, But this is 0:25:52.119 --> 0:25:55.960 just repo funded positions in general, sponsor and otherwise, Okay, 0:25:56.400 --> 0:25:59.160 shall we talk a bit about sponsored repo in that case, 0:25:59.240 --> 0:26:03.119 because this is talking about dealer's ability to intermediate the 0:26:03.200 --> 0:26:07.280 market being perhaps too small or too constrained versus what's 0:26:07.280 --> 0:26:10.000 going on there. And as you say, one of the 0:26:10.080 --> 0:26:13.480 solutions to this issue has been the idea of sponsored repo, 0:26:14.000 --> 0:26:16.840 which I think basically I wrote about this years ago, 0:26:17.000 --> 0:26:19.560 so I can't remember everything, but I think it basically 0:26:19.720 --> 0:26:24.960 allows banks to transact with counterparties like hedge funds without 0:26:25.080 --> 0:26:29.320 necessarily bumping up against balance sheet constraints, and I think 0:26:29.400 --> 0:26:31.680 they get it from the f d I C or no, sorry, 0:26:31.760 --> 0:26:34.760 from the f I c C from Thick. Yeah. So 0:26:35.359 --> 0:26:37.840 if the issue is balance sheet is a zero sum game, 0:26:38.600 --> 0:26:40.760 then if you can increase the amount of balance sheet 0:26:40.760 --> 0:26:44.320 that's being passed around the balantie capacity of banks, then 0:26:44.359 --> 0:26:46.400 you've addressed the problem in part. So there's a couple 0:26:46.400 --> 0:26:47.720 of ways to do that. The first is you can 0:26:47.800 --> 0:26:51.040 just change the rules, right, and that's that's what the 0:26:51.280 --> 0:26:55.399 Fed actually did on a temporary basis. They made a 0:26:55.440 --> 0:26:58.680 temporary change to the supplementary leverage ratio that said, if 0:26:58.800 --> 0:27:02.080 you're if it's or its treasury is on balance sheet, 0:27:02.080 --> 0:27:04.800 which is an important distinction, but if the cash your treasuries, 0:27:05.000 --> 0:27:07.440 it doesn't count anymore or for at least a year. 0:27:08.119 --> 0:27:10.280 And the idea that was to create capacity, right because 0:27:10.320 --> 0:27:12.920 now the size of my balance sheet I used for 0:27:13.040 --> 0:27:16.239 that supplementary leverage ratio is just smaller, and certain things 0:27:16.320 --> 0:27:18.439 don't contribute to that number, so I can do more 0:27:18.480 --> 0:27:20.400 of them. In principle, that was the theory. That doesn't 0:27:20.440 --> 0:27:22.639 necessarily work that way in practice, but you know, it's 0:27:22.680 --> 0:27:25.680 a separate thing. So one way to do this is 0:27:25.760 --> 0:27:28.640 to change the rules, change the game. The other way 0:27:28.720 --> 0:27:30.240 you can do it is played a little differently, and 0:27:30.320 --> 0:27:33.800 so you know, one thing that was proposed very quickly 0:27:33.880 --> 0:27:38.080 after after the crisis in was to introduce a broad 0:27:38.200 --> 0:27:41.240 clearing mandate for the treasury market. And the logic for 0:27:41.320 --> 0:27:45.000 that was, on the one hand, it reduced settlement risk 0:27:46.000 --> 0:27:48.520 by having all of these transactions go through a central counterparty, 0:27:48.880 --> 0:27:51.760 so it will be less likely that securities, for example, 0:27:51.800 --> 0:27:53.760 I could not be found in time, have less failures 0:27:53.800 --> 0:27:57.840 to deliver, which in principle has an impact on uncertain 0:27:58.280 --> 0:28:01.240 capital requirements and so forth. But you know, the more 0:28:01.320 --> 0:28:04.440 interesting from my perspective, impact of that was that in 0:28:04.480 --> 0:28:06.919 the repo market, if you were to clear all those trades, 0:28:07.480 --> 0:28:10.760 the impact of central clearing is, say everyone's facing the 0:28:10.840 --> 0:28:15.280 same counterparty. They're all facing fix, which is the clearing house. Um, 0:28:15.400 --> 0:28:17.440 it's the same way it works in derivatives markets, where 0:28:17.880 --> 0:28:21.360 everyone faces the CME because they're all there, all their 0:28:21.520 --> 0:28:25.680 derivative exposures, all those contracts are novated or transferred to 0:28:25.760 --> 0:28:28.760 a central counterparty that serves as the other side to 0:28:28.840 --> 0:28:31.520 every trade, and so like they're naturally off setting because 0:28:31.520 --> 0:28:35.560 every derivative markets are definitionally zero sum, and so they 0:28:35.600 --> 0:28:37.520 have all the positions they can. They can match off 0:28:37.600 --> 0:28:41.200 trades and reduce the overall through credit risk embedded in 0:28:41.240 --> 0:28:43.320 derivative contracts. So in the in the treasury market, the 0:28:43.360 --> 0:28:47.720 idea was, well, what if everybody just faced thick And 0:28:47.920 --> 0:28:49.920 that has a couple of implications, but one of the 0:28:49.960 --> 0:28:53.320 most important is that when they banks measure their balance sheet. 0:28:54.080 --> 0:28:56.800 One of the ways they do that in repo markets, 0:28:56.800 --> 0:28:59.160 as they say, am I facing the same counterparty? So 0:28:59.160 --> 0:29:01.680 if you borrowed with the left and lent with the right, 0:29:02.280 --> 0:29:04.400 you're kind of economically neutral. But if you do that 0:29:04.480 --> 0:29:07.800 facing different counterparties, then they both contribute or one of 0:29:07.840 --> 0:29:10.360 them contributes to to the leverage. And and that's because 0:29:10.360 --> 0:29:13.480 those two trades can see each other in principle. But 0:29:13.560 --> 0:29:15.600 if everyone's facing the same counterparty, then they can. And 0:29:15.680 --> 0:29:18.280 so the idea there was, well, banks will get balance 0:29:18.280 --> 0:29:21.880 sheet relief and elasticity, meaning they can grow their exposures 0:29:21.920 --> 0:29:25.240 as needed because there'll be lots of offsets in the 0:29:25.280 --> 0:29:28.719 way you measure leverage, and if you can count all 0:29:28.760 --> 0:29:33.120 your economic offsets in your regulatory exposure, then that ratio 0:29:33.240 --> 0:29:35.360 is less binding, which is like a lot of technical 0:29:35.400 --> 0:29:38.600 ways to say, you know, a central counterparty will reduce 0:29:38.640 --> 0:29:40.200 the amount of letg. You have to show from your 0:29:40.240 --> 0:29:59.240 regulatory requirements. Why can't they just make those rules the 0:29:59.400 --> 0:30:03.000 one year your rule where they said treasuries are equill cash, 0:30:03.160 --> 0:30:05.840 why not just make that permanent, especially since other parts 0:30:05.920 --> 0:30:08.200 of the law indicate that, and as you mentioned, like 0:30:08.280 --> 0:30:10.400 you can pay your taxes with treasuries, So why not 0:30:10.640 --> 0:30:13.320 just if so many parts of the law say treasuries 0:30:13.320 --> 0:30:15.480 are cash, why not just have that be a permanent 0:30:15.560 --> 0:30:18.320 part of bank regulations. Well, people have made that argument. 0:30:18.520 --> 0:30:21.440 It's an ongoing debate as to other treasuries to be excluded. 0:30:21.440 --> 0:30:23.200 It would be a little difficult in the context of 0:30:23.280 --> 0:30:26.400 international standards to exclude treasuries and not be a little 0:30:26.480 --> 0:30:30.479 out of out of the mainstream. But certainly cash at 0:30:30.520 --> 0:30:32.680 the FED is one of those things that people argue 0:30:32.680 --> 0:30:34.360 shouldn't be included. And one way to think about that 0:30:34.560 --> 0:30:36.400 is if you get a lot of how might can 0:30:36.440 --> 0:30:38.800 re line of credit right, and you take a hundred 0:30:38.840 --> 0:30:41.120 thousand dollars out and you take that hundred thousand dollars 0:30:41.120 --> 0:30:43.600 you put in the bank account and keep it there. 0:30:43.800 --> 0:30:46.080 Don't do anything with it. So you always have cash 0:30:46.120 --> 0:30:47.400 in the bank to pay down the loan, but you 0:30:47.440 --> 0:30:49.959 still have the loan. Has your credit gone down? Are 0:30:50.000 --> 0:30:52.520 you less credit worthy now as a consequence of doing that? 0:30:52.640 --> 0:30:55.240 Because if you're if you're you want, if you have 0:30:55.240 --> 0:30:57.080 a new liability and you have cash to back it, 0:30:57.840 --> 0:31:01.320 you're you're sort of not really necessarily reducing your your 0:31:01.400 --> 0:31:04.080 credit quality as a borrower, right, And so should you 0:31:04.120 --> 0:31:06.120 have to hold more capital against that position is kind 0:31:06.160 --> 0:31:08.760 of the lot the question, and and a lot of 0:31:08.840 --> 0:31:11.840 jurisdictions or some jurisdictions have said, well, you shouldn't write 0:31:11.840 --> 0:31:13.640 you are no longer, You're not less safe for sound 0:31:14.000 --> 0:31:17.400 as a consequence of having more cash on the treasury side. 0:31:17.560 --> 0:31:19.800 You know, people have argued, well that that has interest 0:31:19.880 --> 0:31:22.360 rate risk associated with it. It's not purely fungible, it's 0:31:22.360 --> 0:31:25.200 not purely cashless. Look what happened in you might have 0:31:25.240 --> 0:31:27.840 a market functioning issue. But this is like an ongoing debate, 0:31:27.880 --> 0:31:31.280 which is what's the proper measure of size for a bank? 0:31:31.640 --> 0:31:35.880 Because the need to think about size constraints in general 0:31:36.040 --> 0:31:38.040 is something that the Bossle Committee is very focused on 0:31:38.240 --> 0:31:40.680 and and regulators are very focused on. After after the 0:31:40.720 --> 0:31:43.920 two eight crisis. But you know how you measure that size, 0:31:43.960 --> 0:31:47.040 what actually should contribute to that size measurement? How big 0:31:47.080 --> 0:31:49.680 are you really and how risky are you really? Is 0:31:49.960 --> 0:31:54.720 an ongoing source of debate. But the clearing question what 0:31:54.880 --> 0:31:57.400 what's interesting there? I think And an important to note 0:31:57.480 --> 0:32:00.200 is it's not a matter of direction, meaning you know, 0:32:00.600 --> 0:32:02.920 if you were introduced to clearing mandate, the amount of 0:32:02.960 --> 0:32:06.840 balantie allocated to tripo, like the amount of balanceie size 0:32:06.840 --> 0:32:09.600 you'd show, would go down questions how much, And that's 0:32:09.600 --> 0:32:12.200 where sponsored repo comes in, which is clearing is available 0:32:12.760 --> 0:32:15.240 currently and there's a decent chunk of the market that's 0:32:15.240 --> 0:32:18.040 actually cleared already, and so you know, it's not obvious 0:32:18.200 --> 0:32:20.480 and and there's lots of ways, lots of reasons to 0:32:20.560 --> 0:32:25.800 think that it would likely not meaningfully improve the leverage 0:32:25.880 --> 0:32:28.280 constraints that banks are facing. That that is is a 0:32:29.240 --> 0:32:32.560 very very mild self for what is otherwise a much 0:32:32.600 --> 0:32:36.080 more acute problem. So we don't necessarily have a clearing 0:32:36.280 --> 0:32:39.840 mandate in US treasury trading the way we do for derivatives, 0:32:39.880 --> 0:32:43.280 where trades have to go through a central counterparty, but 0:32:44.320 --> 0:32:47.880 we do have sort of some clearing going on in 0:32:48.000 --> 0:32:51.880 the market through for instance, um if I SEC and 0:32:52.120 --> 0:32:57.480 other ways, rather than just announce a total clearing mandate, 0:32:57.640 --> 0:33:01.840 is there a way to incentivize market participants to do 0:33:02.080 --> 0:33:06.280 more clearing voluntarily. Well, those incentives are there in the price. 0:33:06.600 --> 0:33:10.040 So at times, for example, if you're a cash lender, 0:33:10.760 --> 0:33:13.760 it's been advantageous to do that in a cleared format, 0:33:13.840 --> 0:33:15.960 to do that via sponsored like banks will essentially pay 0:33:16.040 --> 0:33:18.480 up a little bit to incentivize you to do that, 0:33:18.560 --> 0:33:20.320 and the same is true on the borrower side. And 0:33:20.400 --> 0:33:25.040 so like, this kind of balance sheet optimization work is 0:33:25.160 --> 0:33:28.320 something that the larger institutions have gotten quite good at, 0:33:28.760 --> 0:33:32.600 and they know how to price trades to sort of 0:33:32.760 --> 0:33:36.040 push people or nudge them in the direction that benefits 0:33:36.080 --> 0:33:38.760 their regulatory constraints, so that in that sense, like people 0:33:38.760 --> 0:33:42.400 are acting economically, the issue is not so much you know, 0:33:42.640 --> 0:33:45.560 can we push people in that direction? It's more you know, 0:33:45.680 --> 0:33:48.040 what direction do they want to face? And by that 0:33:48.200 --> 0:33:51.400 I mean when when rates are rising? Right for example, Now, 0:33:51.840 --> 0:33:54.320 the way the hedge funds position for that is they 0:33:54.360 --> 0:33:56.719 don't do repos which is a way to buy secure 0:33:56.840 --> 0:34:00.560 by treasuries on using leverage. It's they do rostary buds, 0:34:00.560 --> 0:34:02.320 which is you're going short the market, right, that's how 0:34:02.360 --> 0:34:06.960 you position for rising rates, and so that creates netting inefficiencies, 0:34:06.960 --> 0:34:09.759 which basically means you can't net off trades on the 0:34:10.239 --> 0:34:12.400 on the borrower versus the lender side because there are 0:34:12.400 --> 0:34:14.840 simply less borrowers out there. So you know, the the 0:34:14.880 --> 0:34:17.040 amount of netting you can do in your book goes 0:34:17.160 --> 0:34:19.879 down as a consequence of the positioning of the hedge 0:34:19.920 --> 0:34:23.160 fund and speculative industry, those who are trying to short 0:34:23.200 --> 0:34:26.160 treasuries and so in practice that actually makes a bigger 0:34:26.200 --> 0:34:30.680 difference than the availability is sponsored trades. So it's not 0:34:30.760 --> 0:34:33.160 about access to clearing as much as this is about 0:34:33.200 --> 0:34:35.000 you know, do people think rates are going up or down? 0:34:35.280 --> 0:34:38.560 Which is hothing you obviously can't control. Going back to 0:34:38.719 --> 0:34:43.319 the present tense and you know, obviously March was an 0:34:43.360 --> 0:34:48.520 extraordinary situation. I mean truly, Uh you know, maybe hopefully 0:34:48.840 --> 0:34:51.200 once in a lifetime or once in a century, what 0:34:51.360 --> 0:34:55.360 we've seen more recently should not be that rare. And 0:34:55.520 --> 0:34:57.880 you know it's gonna happen multiple times probably in our 0:34:57.960 --> 0:35:01.520 careers that people are surprised in a significant way by 0:35:01.960 --> 0:35:04.800 the direction of the market. Because that's what markets do. 0:35:05.200 --> 0:35:07.919 What are the lessons here and what you know, how 0:35:08.080 --> 0:35:10.160 bad is it that you know, we saw we have 0:35:10.320 --> 0:35:12.680 this lack of depth, that we have this gap between 0:35:12.719 --> 0:35:15.160 treasuries that are you know, on the run versus off 0:35:15.160 --> 0:35:17.879 the run treasuries and so forth, And is it something 0:35:18.000 --> 0:35:20.440 that needs to be fixed? Is it something that you 0:35:20.480 --> 0:35:23.160 know when you look at this lack of depth needs 0:35:23.239 --> 0:35:26.880 some sort of like policy or architectural solution. Yeah, I 0:35:27.120 --> 0:35:30.520 think the it's important not to oversolve for the problem. So, like, 0:35:30.600 --> 0:35:32.239 as an example, if you have a plate and you 0:35:32.320 --> 0:35:34.759 think it's cracked, and then you smash it on the 0:35:34.840 --> 0:35:38.560 ground and it breaks along the crack, you've confirmed that 0:35:38.640 --> 0:35:40.799 it was cracked, but that doesn't mean you should only 0:35:40.840 --> 0:35:44.080 have plastic plates, right, So, like that's not the right 0:35:44.360 --> 0:35:47.160 level of stress to solve for. And in a lot 0:35:47.200 --> 0:35:51.440 of ways is the smashing of the plate and and 0:35:51.600 --> 0:35:54.239 that it's usually going to break it. And that's because 0:35:54.320 --> 0:35:58.800 it's extremely unusual. It is unique in lots of respects. 0:35:58.840 --> 0:36:00.920 And yes, you could probably say that about any crisis, 0:36:01.040 --> 0:36:03.320 but it's important to recognize that, like, we should not 0:36:03.400 --> 0:36:06.799 be creating or designing a treasury market that is specifically 0:36:06.840 --> 0:36:11.040 calibrated to survive a once in century pandemic liquidity squeeze. 0:36:11.520 --> 0:36:14.480 That that is not the right level of of of 0:36:14.760 --> 0:36:17.719 of rigor. And I think it's likely we can't do 0:36:17.880 --> 0:36:20.560 that within reasonable constraints, Like there's a lot of reasons 0:36:20.640 --> 0:36:23.840 to think that even in the absence of of leverage constraints, 0:36:23.880 --> 0:36:28.080 even in the absence of of other issues, would have 0:36:28.120 --> 0:36:31.400 been a mess in lots of ways regardless, So it's 0:36:31.480 --> 0:36:34.000 unclear that we could actually have avoided that fate. The 0:36:34.640 --> 0:36:36.520 but the question is do we want a more resilient 0:36:36.560 --> 0:36:38.640 treasury market. I think they're The answer is very much yes. 0:36:39.400 --> 0:36:41.080 It's important when we think about that if we go 0:36:41.200 --> 0:36:44.080 through the list of reforms that have been proposed, to 0:36:44.360 --> 0:36:47.120 think more in terms of like what is the what 0:36:47.280 --> 0:36:49.480 is the quantitative impact, like how much is this going 0:36:49.520 --> 0:36:51.360 to help? Not will it help? How much will it 0:36:51.440 --> 0:36:56.320 help to reduce the fragilities in a system that that 0:36:56.560 --> 0:37:00.879 under much less extreme circumstances, how has exhibited a lot 0:37:00.960 --> 0:37:04.120 of a lot of frailty. And and that comes back 0:37:04.200 --> 0:37:11.680 to this issue of disincentivizing banks from taking on high leverage, 0:37:11.719 --> 0:37:15.560 low risk positions. Among those are RIPO and treasury intermediation 0:37:16.239 --> 0:37:18.520 and to to say that there's a lot of reasons. 0:37:18.600 --> 0:37:20.680 And this goes all the way back to the the 0:37:20.760 --> 0:37:23.719 Fed Treasury cord in I teen fifties, where like the 0:37:24.360 --> 0:37:26.719 proper function of the treasuring market is is a is 0:37:26.719 --> 0:37:29.800 a matter of of national importance, like the the economy 0:37:30.160 --> 0:37:33.640 requires it and so and it needs to be robust 0:37:33.760 --> 0:37:37.440 to modest shocks or even significant ones. And so you know, 0:37:37.680 --> 0:37:41.360 the question is when we, for example, include reserves in 0:37:41.480 --> 0:37:43.520 the in the leverage rat show. And the reason why 0:37:43.520 --> 0:37:45.520 I'm talking about cashing out treasuries is that you know, 0:37:45.640 --> 0:37:48.640 capital is fungible, right, you have some capital requirement, and 0:37:48.680 --> 0:37:51.680 if you create more space relative to minimums, if you 0:37:51.760 --> 0:37:55.160 make sure the supplement or leverage ratio is really a 0:37:55.239 --> 0:37:59.040 backstop rather than a binding constraint, then you have space 0:37:59.120 --> 0:38:01.560 to do other activity that would otherwise consume balance sheet. 0:38:02.120 --> 0:38:04.680 And and one of those treasury trading. You know, we 0:38:04.800 --> 0:38:07.000 have to think about and and the Ft has been 0:38:07.040 --> 0:38:09.680 quite clear that they are thinking about this. Whether now 0:38:09.719 --> 0:38:11.440 the banking system is less safe and sound is a 0:38:11.480 --> 0:38:14.880 consequence of a higher reserve balance, and whether that's the 0:38:15.000 --> 0:38:18.320 right way to think about capital requirements and safety and 0:38:18.320 --> 0:38:20.960 sound is. So that's on the regulatory side, and then 0:38:21.000 --> 0:38:22.920 on the market structure side. You know, there are certain 0:38:23.600 --> 0:38:28.200 ways in which you could reduce these procyclical tendencies. And 0:38:28.440 --> 0:38:31.680 one of the things I like to highlight is cross margining. 0:38:31.719 --> 0:38:35.480 It was cross margining in back in the ball was 0:38:35.680 --> 0:38:40.439 very high and in those basis positions, the two legs 0:38:40.480 --> 0:38:43.200 of the trade were margined separately. And by margin separately, 0:38:43.320 --> 0:38:45.959 I mean that the tread the margin had to post 0:38:46.000 --> 0:38:48.719 against the futures leg was based on an outright exposure. 0:38:49.120 --> 0:38:52.840 The margin had to post against the cash leg. The 0:38:52.920 --> 0:38:55.360 securities was an outright exposed based on raisin posed and 0:38:55.360 --> 0:38:57.440 they couldn't see each other, so you could be sort 0:38:57.480 --> 0:38:59.320 of well hedged, but still have to post margin on 0:38:59.400 --> 0:39:02.120 both sides of your heads because those those two hedges 0:39:02.800 --> 0:39:06.319 were margined independently. That sounds like a technical nuance. Why 0:39:06.360 --> 0:39:08.239 am I talking about that in the context of like 0:39:08.400 --> 0:39:11.080 changes to the overall structure the banking system. It's because 0:39:11.120 --> 0:39:15.000 that creates post prosec locality back in and at that time, 0:39:15.360 --> 0:39:20.000 the futures margins increased by several times very quickly, and 0:39:20.160 --> 0:39:23.160 that naturally delivers the entire financial system, because if you 0:39:23.160 --> 0:39:25.719 have to post more cash against a position, you get 0:39:25.800 --> 0:39:29.000 less leverage. And you know that might be desirable under 0:39:29.080 --> 0:39:31.719 normal times. I'm like, I say it's necessarily desirable. You 0:39:31.800 --> 0:39:33.560 might want less leverage in the system, you might want more, 0:39:34.200 --> 0:39:36.920 but reducing it rapidly during a period of stress is 0:39:37.120 --> 0:39:40.920 sort of the factor problematic, both in in practical terms 0:39:40.960 --> 0:39:42.920 because you gotta find that cash, but also like the 0:39:43.000 --> 0:39:45.719 signaling value that it's it's important to keep in mind 0:39:46.520 --> 0:39:51.200 if margins get tripled and no liquidations actually come as 0:39:51.200 --> 0:39:53.080 a result of that, no one liquidates positions, they find 0:39:53.120 --> 0:39:55.880 the cash elsewhere. You can still trade the market like 0:39:56.040 --> 0:39:58.279 there might be liquidations, and and then it sort of 0:39:58.360 --> 0:40:00.399 has the same impact. And you can you can see 0:40:00.440 --> 0:40:02.560 that in part from the commodities experience in the past 0:40:02.600 --> 0:40:06.040 few months, is there was this concern that margin requirements 0:40:06.080 --> 0:40:08.120 were going to be We're going to force liquidations of 0:40:08.200 --> 0:40:11.120 positions and and and that just creates a whole the 0:40:11.160 --> 0:40:13.680 whole mess. So you know, one of the things you 0:40:13.760 --> 0:40:15.120 can do is you can say, look, if you're well 0:40:15.200 --> 0:40:17.759 hedged on an economic basis, you shouldn't have to post 0:40:17.760 --> 0:40:21.160 as much margin. And that just reduces the pro cyclical 0:40:21.280 --> 0:40:24.919 dynamic that the margin cycle introduces um and it makes 0:40:24.960 --> 0:40:30.080 the market sort of more resilient to volatility shocks. You 0:40:30.239 --> 0:40:33.560 mentioned how the FED is thinking about these issues, and 0:40:33.880 --> 0:40:37.120 I think they published a couple of papers on this topic. 0:40:37.680 --> 0:40:43.160 But why it doesn't the FED feel compelled to intervene 0:40:43.320 --> 0:40:47.160 because clearly it's comfortable unwinding it's balance sheet. This is 0:40:47.200 --> 0:40:49.560 just to play Devil's Advocate, by the way, but it's 0:40:49.760 --> 0:40:54.920 comfortable unwinding it's balance sheet. It's comfortable, I don't want 0:40:54.960 --> 0:40:59.320 to say abandoning forward guidance, but certainly surprising the market 0:40:59.560 --> 0:41:02.600 as it recently. What do they see here that maybe 0:41:02.840 --> 0:41:06.880 market participants don't or where does the difference in opinion 0:41:06.960 --> 0:41:08.840 come from? Well, I think this comes back to the 0:41:08.920 --> 0:41:12.040 question of is it a liquid or is it not functioning? 0:41:12.360 --> 0:41:16.600 And this is where I think the the somewhat hyperventilating 0:41:16.640 --> 0:41:20.200 language that traders often use is not terribly helpful. So, like, 0:41:20.719 --> 0:41:22.640 the number of times anyone has been told their face 0:41:22.680 --> 0:41:24.480 has been ripped off is like, probably not the right 0:41:24.560 --> 0:41:27.160 number of times relative to how like intense that image is, 0:41:27.280 --> 0:41:30.400 And so things are not I guess, And that's that 0:41:30.680 --> 0:41:35.600 bad because transaction costs are manageable like if if risk 0:41:35.719 --> 0:41:37.680 is is clearing, if you can get the trade done, 0:41:37.719 --> 0:41:40.359 you can do it at relatively tight but offer at 0:41:40.400 --> 0:41:43.120 least in the current issue that most recently issued bonds, 0:41:43.200 --> 0:41:46.000 So like in that sense, the market is functioning. The 0:41:46.200 --> 0:41:50.160 high freaksity traders have stayed involved much more so than 0:41:50.320 --> 0:41:53.760 than prior volatility episodes. There have been some structural changes 0:41:53.800 --> 0:41:56.040 to them, to the way these markets operate, and one 0:41:56.080 --> 0:41:59.279 of the big advancements since has been the rise of 0:41:59.320 --> 0:42:02.840 what what are are called bilateral streams or private central 0:42:02.880 --> 0:42:05.239 limit order books, where you know, the issue with broker 0:42:05.280 --> 0:42:06.840 techt is when you put it in order, everyone can 0:42:06.880 --> 0:42:08.440 see it, even if they don't know who put it in. 0:42:08.560 --> 0:42:13.719 Whereas these bilateral streams and private order books allow you 0:42:13.840 --> 0:42:16.359 to string prices directly to specific clients so you don't 0:42:16.400 --> 0:42:18.360 have to tip your hand in the same way. And 0:42:18.440 --> 0:42:20.520 that that sounds like a small change, but it makes 0:42:21.280 --> 0:42:23.960 it makes the showing of bigger size in general much easier, 0:42:24.040 --> 0:42:26.320 so markets are more resilient. As consequence, that's become a 0:42:26.400 --> 0:42:30.120 much more common way to trade inter dealer that then 0:42:30.239 --> 0:42:32.360 was the case even a year ago. The question is 0:42:32.400 --> 0:42:34.480 why are yields actually going up and is that bad 0:42:35.000 --> 0:42:38.279 um And if you're the FED, you want to tighten 0:42:38.320 --> 0:42:42.280 financial conditions presumably, so rising yields are not prima facial problem. 0:42:42.520 --> 0:42:44.399 I feel like a dealer inventory is they're pretty low. 0:42:44.719 --> 0:42:46.960 If you look at the way the RepA market is trading, 0:42:47.440 --> 0:42:50.960 it suggests a scarcity of collateral. It's just's not enough 0:42:51.000 --> 0:42:53.560 funds in the system rather than too many. What's probably 0:42:53.640 --> 0:42:57.799 happening here is speculative investors are going short the market 0:42:57.840 --> 0:43:00.360 in the way I describe through reverse repos more so 0:43:00.520 --> 0:43:03.960 than real money, and users of securities of treasury bonds 0:43:04.360 --> 0:43:07.759 were actually selling them, and so that's a lot less concerning, right, 0:43:07.800 --> 0:43:09.800 So on the one hand, you're kind of getting the 0:43:10.320 --> 0:43:14.120 macroeconomic outcome you want, and on the other you don't 0:43:14.239 --> 0:43:18.759 have the outflows from from the real firm hands in 0:43:18.800 --> 0:43:21.480 the market at the nearly the same scale you had 0:43:21.520 --> 0:43:23.759 in twenties. So the need of the FED to take 0:43:23.840 --> 0:43:26.280 those bonds out of the system is a lot less 0:43:27.080 --> 0:43:31.080 because they're floating around in the levered complex anyways. It's 0:43:31.120 --> 0:43:33.640 not like you have long term holders looking to liquidate 0:43:33.719 --> 0:43:35.320 and no one on the other side. You take it 0:43:35.400 --> 0:43:37.360 all together and like, what what if I was at 0:43:37.400 --> 0:43:39.719 the FED way to be concerned. Absolutely, you know, low 0:43:39.840 --> 0:43:43.040 levels of depth, high levels of all, a very uncertain 0:43:43.120 --> 0:43:47.200 macroeconomic environment and policy environment are all reasons for concern. 0:43:48.080 --> 0:43:51.440 But would I'd be convinced that not only are markets 0:43:51.600 --> 0:43:54.320 functioning poorly, but that they are not functioning to the 0:43:54.360 --> 0:43:57.200 point where this could create other contagion effects in the 0:43:57.239 --> 0:44:01.080 financial system and necessitates basically sucking the Venomo out, which 0:44:01.120 --> 0:44:04.520 is what those market functioning purchases were. We're definitely not there. 0:44:04.600 --> 0:44:07.000 I mean, we're we're very far away from that kind 0:44:07.040 --> 0:44:09.279 of thing, so, you know, in that sense, it's a 0:44:09.360 --> 0:44:12.880 familiar kind of stress, which is still no fun, but 0:44:13.000 --> 0:44:16.640 it is not the kind of existential angst created by 0:44:17.440 --> 0:44:21.200 by the environment of existential angst. That's a good way 0:44:21.280 --> 0:44:23.480 of describing it. Josh, We're going to have to leave 0:44:23.520 --> 0:44:24.840 it there. I feel like we could talk to you 0:44:24.960 --> 0:44:28.000 for another hour on this topic. But thank you so 0:44:28.120 --> 0:44:31.000 much for coming on all thoughts. That was great, that 0:44:31.120 --> 0:44:50.200 was great feedback. Thanks for having yea. Thanks John so Joe. 0:44:50.280 --> 0:44:52.640 I feel like existential angst is a really good way 0:44:52.680 --> 0:44:55.600 of putting the experience of and that's when we did 0:44:55.719 --> 0:45:01.120 see some momentum towards actually addressing of problems that Josh's 0:45:01.120 --> 0:45:03.960 outlining in the world's most important market. But it does 0:45:04.080 --> 0:45:09.000 feel like, absent a major crisis, these issues just kind 0:45:09.040 --> 0:45:11.920 of like limp along. Yeah, I think that's right. And 0:45:12.120 --> 0:45:14.239 you know, it's not some of this stuff. It's not 0:45:14.520 --> 0:45:16.680 the end of the world per se. It's not an 0:45:16.760 --> 0:45:20.200 imminent crisis. But because it is the world's most important market, 0:45:21.040 --> 0:45:23.560 there are reasons to be concerned when you see some 0:45:23.680 --> 0:45:26.840 of these lack of liquidity or the fragmentation that he discussed. 0:45:27.080 --> 0:45:30.480 You know, the thing that gets me is it feels 0:45:30.480 --> 0:45:32.600 like there are so many different moving parts that work 0:45:32.719 --> 0:45:36.280 cross purposes. You have some laws that say treasury should 0:45:36.320 --> 0:45:39.879 be cash, other laws that say banks can't get too big. 0:45:40.280 --> 0:45:44.080 You have other situations in which expansive FED balance sheet 0:45:44.280 --> 0:45:46.920 helps liquidity. On the other hand, the Fed feels it 0:45:47.040 --> 0:45:50.560 needs to shrink its balance sheet for its monetary policy purposes, 0:45:51.000 --> 0:45:53.000 which are all those You have all these different things 0:45:53.080 --> 0:45:55.800 that each individually may have some logic, but it's the 0:45:55.960 --> 0:45:58.560 confluence of all of them that see where the problems 0:45:58.560 --> 0:46:01.120 seem to create. I think that's exactly right. Also, something 0:46:01.160 --> 0:46:03.840 I didn't know up until recently do you know REPO 0:46:03.960 --> 0:46:07.239 contracts are apparently exempt from the automatic stay of bankruptcy. 0:46:07.640 --> 0:46:09.920 That was something Paul Vulker did. What does that mean? 0:46:10.280 --> 0:46:13.400 So it means if a company goes bankrupt, they're like 0:46:13.600 --> 0:46:19.400 repo assets don't automatically get frozen and then distributed to creditors. So, like, 0:46:20.520 --> 0:46:22.880 you know, if you want to treat treasuries like cash. 0:46:23.560 --> 0:46:25.200 On the other hand, if someone has a treasury that 0:46:25.239 --> 0:46:29.000 they've used as REPO collateral in a bankruptcy, wouldn't necessarily 0:46:29.080 --> 0:46:32.800 be distributed. Sorry, I'm getting really interest, but speak to 0:46:33.040 --> 0:46:35.400 the issues. That's exactly right. Yeah, do we want to 0:46:35.440 --> 0:46:38.160 treat them like cash or do we not? And should 0:46:38.200 --> 0:46:42.799 we actually have it holistic approach towards the market? They 0:46:42.880 --> 0:46:46.040 have to all all the regulators and policy authorities just 0:46:46.120 --> 0:46:47.600 have to get in the same room. And it's like, 0:46:47.680 --> 0:46:51.560 let's get on the same Yeah, okay, well, well we'll 0:46:51.600 --> 0:46:53.440 make that happen. I'm sure. Should we leave it there? 0:46:53.520 --> 0:46:55.920 Let's leave it there. This has been another episode of 0:46:56.000 --> 0:46:58.520 the All Thoughts podcast. I'm Tracy Alloway. You can follow 0:46:58.600 --> 0:47:01.080 me on Twitter at Tracy all the Way and I'm Joe. 0:47:01.160 --> 0:47:03.600 Why isn't though You can follow me on Twitter at 0:47:03.640 --> 0:47:07.359 the Stalwart. Follow our producer Carmen Rodriguez on Twitter She's 0:47:07.440 --> 0:47:10.560 at Kerman Arman, and follow all of our podcast is 0:47:10.560 --> 0:47:14.000 Bloomberg under the handle at podcasts. Thanks for listening.