Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast.
Speaker 1: I'm Tracy Allaway and Joe. What's more volatile than cryptocurrencies
Speaker 1: at the moment. I don't know if this is a
Speaker 1: trick question, because I think there are a number of things,
Speaker 1: but one thing that most people didn't expect up until
Speaker 1: recently was bonds, US government bonds. I don't think they've
Speaker 1: been it is volatile. Is cryptocurrencies? What they have been volatile? Now,
Speaker 1: wait a second, there was a day where they actually
Speaker 1: were more volatile than bitcoin at least, and I think
Speaker 1: it was It was earlier this month after the Wall
Speaker 1: Street Journal released that article saying that the FED might
Speaker 1: hike rates by basis points right, and suddenly we had
Speaker 1: this big move in bond yields and I think the
Speaker 1: tenure U S Treasury the yield on jump something like
Speaker 1: twenty eight basis points in a day, which was I know,
Speaker 1: you love this a four standard deviation move and the
Speaker 1: kind of thing that's only supposed to happen based on
Speaker 1: normal distributions, Like once in a century have you ever
Speaker 1: seen that tweet about this seemed to leave breaking through
Speaker 1: the wall like the cool man? Have you? Like every
Speaker 1: time someone says standard deviation, I'm not surprised. I'll find
Speaker 1: it for you. Thank you. There's a really funny tweet
Speaker 1: about it. Anyway, I will say that was a wild day.
Speaker 1: I remember that Nick timorrose at the Washer journals and
Speaker 1: they're gonna go instead of fifty and everyone believed them
Speaker 1: and right, and it was just this huge instant repricing
Speaker 1: of the entire curve, like really shocking, right, And so
Speaker 1: a four standard deviation move, make of that what you will.
Speaker 1: But bitcoins like move in the same period was something
Speaker 1: like two point seven standard deviations. So we're talking about
Speaker 1: the market for US treasury debt, which is one of
Speaker 1: the most probably the most important market in the world.
Speaker 1: It's basically the risk free asset against which all other
Speaker 1: assets are judged, and it's supposed to be the most
Speaker 1: liquid market in the world as well, And yet it's
Speaker 1: having these big moves. And this isn't the first time, right,
Speaker 1: you know, I said a move that's only supposed to
Speaker 1: happen once in a century, But actually we see these
Speaker 1: moves relatively often. And of course we had the big
Speaker 1: blow up in yields in March. We had a big
Speaker 1: rally in yields, and I think it was. We've had
Speaker 1: numerous other high profile incidents where the market just seems
Speaker 1: to like go nuts in extreme periods of alatility. We
Speaker 1: do see this stress and it's it's not supposed to happen, right, Like,
Speaker 1: that's the whole idea here, which is that there are
Speaker 1: certain financial assets where yeah, it's supposed to happen, kind
Speaker 1: of with treasuries because they're theoretically risk free, and because
Speaker 1: say they can theoretically be you know, theoretically from an
Speaker 1: economic standpoint, be like equivalent to reserves or almost like
Speaker 1: cash at some point, the ultimate safe haven asset, uh asset.
Speaker 1: They're supposed to just be that, like the one, the
Speaker 1: one predictable thing, the son of the you know, the sun,
Speaker 1: around which the financial universe revolves around, and everyone's in
Speaker 1: a while, it doesn't happen, and that's not good. Yes,
Speaker 1: not good is a good way of putting it. The
Speaker 1: other thing that's happening at the moment is the FED
Speaker 1: has started to unwind its massive balance sheet, right yeah. No,
Speaker 1: So it's like I get another factor here, right, um,
Speaker 1: And that actually happened. I think they started unwinding in
Speaker 1: the same week where they raised interest rates by seventy
Speaker 1: five basis points, so of course no one actually noticed
Speaker 1: that this had started. But there's all these things going
Speaker 1: on in the market. It seems like we keep getting
Speaker 1: these dramatic events, so we really we need to dig
Speaker 1: into it, don't we do it? All right, we do
Speaker 1: actually have the perfect person to discuss. We are going
Speaker 1: to be speaking with Josh Younger. He is currently a
Speaker 1: managing director and Global head of Asset Liability Management, Research
Speaker 1: and Strategy at JP Morgan. He was previously doing cell
Speaker 1: side research at JPM, writing about interest rates and money market.
Speaker 1: It's which I think was the last time we had
Speaker 1: him on and I didn't know this, but he was
Speaker 1: previously an astrophysicist, studying things like black holes and what
Speaker 1: happens when large objects collide against each other. So maybe
Speaker 1: the perfect analogy for the bond market. Perfect, all right, Josh,
Speaker 1: thank you so much for coming on. All thoughts, Thanks
Speaker 1: very much for having it. It's great to be back.
Speaker 1: So maybe just as a as a beginning question, I
Speaker 1: think people have probably heard that there may be liquidity
Speaker 1: issues in the U S. Treasury market, or certainly there
Speaker 1: are these bouts of volatility, but could you maybe give
Speaker 1: us some color of what exactly we mean when we
Speaker 1: talk about liquidity in the treasury market and what exactly
Speaker 1: happens on a day like the one we saw recently
Speaker 1: where ten year yields made this massive move. Yeah, so
Speaker 1: I know it's it's always weird to see a four
Speaker 1: standard deviation event, but if people were around, we had
Speaker 1: a fifteen standard deviation event at least over a short
Speaker 1: time scale. So, pulling in my old education, that's not
Speaker 1: supposed to happen in the lifetime of the universe. So, uh,
Speaker 1: standard deviations have their place. But you know, the normal assumption,
Speaker 1: the Bell curve assumption, is not always necessarily the best one.
Speaker 1: And for treasury markets in particular, you know what people
Speaker 1: like to say that there are lots of fat tails,
Speaker 1: like like unfrequent things happen at a much higher frequency
Speaker 1: than you or otherwise expect. That's true of all financial markets.
Speaker 1: It's definitely true bond markets. But the question when we
Speaker 1: bring up liquidity is if we look at big changes
Speaker 1: in price, is that because things have really changed, or
Speaker 1: is it because there's some kind of market functioning or
Speaker 1: other issue that is causing the price change to be
Speaker 1: exacerbated for reasons other than fundamentals. So, uh, this is
Speaker 1: a tough environment because you know the ft is actually
Speaker 1: raising rates by seventy five basis points in a meeting,
Speaker 1: So the outlook is truly changing rapidly, and so rapid
Speaker 1: price changes would be expected just because you know the
Speaker 1: fundamentals are shifting at the same pace. But we do
Speaker 1: want to figure out out and watch if the market
Speaker 1: is unable to transfer risk, because that's kind of what
Speaker 1: the markets supposed to do. This was a lineup buyers
Speaker 1: and sellers and take care of those bonds that don't
Speaker 1: have an immediate buyer but have an immediate seller vice versa.
Speaker 1: Like they're supposed to smooth out these fluctuations by by
Speaker 1: having somebody in the middle. It's a market maker who's
Speaker 1: the buyer to the sellers and the seller to the buyers,
Speaker 1: and and can hold onto stuff that doesn't have an
Speaker 1: immediate home. It's just basically running a store, right like
Speaker 1: you're running a candy store. You've got inventory, you have
Speaker 1: orders coming in, you've got customers coming in. You need
Speaker 1: shell space, but you also need to make sure you
Speaker 1: have enough customers to take out the inventory you're getting
Speaker 1: in so you need to line all those things up,
Speaker 1: and unfortunately, when you're a market maker, you can't really
Speaker 1: control your inventory right that someone else's decision as opposed
Speaker 1: to the candy store. But there are different ways to
Speaker 1: to look at this um Usually we talked about the
Speaker 1: depth of the market, which is if you look at
Speaker 1: the screen. You're a trader on a desk and any
Speaker 1: given dealer and you looked at the screen electronic markets
Speaker 1: between dealers where they put up you know, I'm willing
Speaker 1: to buy this much at this price or sell this
Speaker 1: much at that price. How much size could you move
Speaker 1: near the current price in the market. That's the market
Speaker 1: depth that's really low. So that's immediately concerning because if
Speaker 1: depth is low, that means if I go to sell
Speaker 1: something that's bigger than the size on the screen, presumably
Speaker 1: the price is going to change. And if that size
Speaker 1: on the screen is really small, then an incrementally larger
Speaker 1: trade still small in the grand scheme of things, is
Speaker 1: going to move the price a lot. And the implication
Speaker 1: is the market can't transfer risk without a big price impact.
Speaker 1: So that's that's really important before moving on from that
Speaker 1: on market depth. So okay, like Nick Timorrose comes out
Speaker 1: and says they're gonna go. Of course you would expect
Speaker 1: to see a big move because there is fundamental news.
Speaker 1: There's a reason for the price of the curve to change.
Speaker 1: Is markets digest the sort of new thing about the
Speaker 1: fed trajectory. But as you say, it's like, okay, that's
Speaker 1: gonna happen. How do you measure depth? What would be
Speaker 1: sort of normal or healthy depth? Like, how would you
Speaker 1: quantify that? And then what is the quantification of depth?
Speaker 1: Right now? When the when the dealers look at their screen.
Speaker 1: So we're data limited here because there's there's really two
Speaker 1: kinds of markets that exist in something like a hubb
Speaker 1: and spoke or a network. The first is the net
Speaker 1: the the end users, right, so the holders of treasury bonds.
Speaker 1: It could be a foreign central bank, it could be
Speaker 1: an asset manager, a hedge fund. But the non dealer,
Speaker 1: non bank end users of bond debt, so they just
Speaker 1: hold it as an investment or a speculative asset. And
Speaker 1: then and that market faces the dealers because when you
Speaker 1: go to sell that bond or by another bond, you
Speaker 1: call up your dealer, right, So there's there's an interface
Speaker 1: there that is not particularly observed, but we don't really
Speaker 1: know what's going on there. Usually people call that voice trading,
Speaker 1: which is really like in the institutional market, I would
Speaker 1: call up my dealer and say I need to sell
Speaker 1: you a billion of tenure notes like big trades, big
Speaker 1: institutional trades, and when retail gets smaller sizes, usually there's
Speaker 1: some institution standing between them and the dealers, and then
Speaker 1: there's the market between the dealers themselves. And in this
Speaker 1: context dealer we'll talk about. I'm sure that the h
Speaker 1: f T component of this the high frequency component, but
Speaker 1: like the injured dealer, market is the way that dealers
Speaker 1: pass frists around between each other, and in some sense
Speaker 1: that's the more important market because if you think of
Speaker 1: yourself as buying whatever someone is selling, and selling whatever
Speaker 1: someone is buying, the amount of size you're willing to
Speaker 1: show that the size trade you're willing to do is
Speaker 1: informed by how easily and cheaply you can hedge that.
Speaker 1: So the way I like to think about this, and
Speaker 1: I'll get to your question in a second, the way
Speaker 1: to think about this is you've got sort of risk
Speaker 1: coming in from the outside, and users selling a bond,
Speaker 1: for example, say they're selling a billion of those tenure notes,
Speaker 1: They're going to call one or two dealers, not gonna
Speaker 1: call everybody. Those one or two dealers are going to
Speaker 1: buy that debt at some price, and they're gonna try
Speaker 1: to hedge it. And what hedging really is is socializing
Speaker 1: that slug of risk across the broader complex of dealers.
Speaker 1: So they're all going to keep a piece of it,
Speaker 1: but they're not going there. One dealer is not going
Speaker 1: to hold the whole billion outright, there's too much risk
Speaker 1: to hold as a market maker. Yields move a little bit,
Speaker 1: all of a sudden, you've run through all of your capital,
Speaker 1: and that's a problem. So the active hedging is the
Speaker 1: act of taking pieces of that and spreading it around.
Speaker 1: And that's what the inter dealer market does. That's the
Speaker 1: electronic market that trades much more frequently. It's a decent
Speaker 1: chunk of the overall volume traded, but it's almost entirely
Speaker 1: concentrated in recently issued bonds. Broke a text by part
Speaker 1: of the biggest venue for that UM. And that's where
Speaker 1: we have good data because it's electronic, so we can
Speaker 1: see the screens, so to speak, UM and we can
Speaker 1: capture that data, and we can look at, say the
Speaker 1: the total number of bids and offers within say two
Speaker 1: to three levels of the best price. This is the
Speaker 1: central limited order book. People call them CLOBs um, which
Speaker 1: is always kind of a fun acronym, but they can
Speaker 1: track that and say within three levels of the best price,
Speaker 1: there is x million dollars on the screen to trade
Speaker 1: on average during say the New York trading session. When
Speaker 1: you do that, on average something like a hundred and
Speaker 1: fifty million. Over long periods of time, for the past
Speaker 1: ten years, that's averaged something like a hundred and fifty
Speaker 1: two hundred millions, so that would be sort of typical
Speaker 1: and bad times that can go down to five to
Speaker 1: ten that's what we had in Now it's probably around
Speaker 1: fourty or fifty million on average. Now this fluctuates a
Speaker 1: lot over the course of the trading day, but this
Speaker 1: is like if you were to close your eyes and
Speaker 1: then you know, pick a time and look at it,
Speaker 1: you get something like forty million to trade within three
Speaker 1: levels of the best price. So that's low um. The
Speaker 1: reason why that's important again is because that's that's the
Speaker 1: liquidity available to the dealers themselves to hedge their risk,
Speaker 1: and so if that number gets higher, they're willing to
Speaker 1: make bigger markets facing clients. If that number gets smaller,
Speaker 1: they're willing to get make smaller markets because they don't
Speaker 1: have confidence that they can hedge out of the risk.
Speaker 1: So that's low along the lines of different volatility episodes
Speaker 1: we've seen in the past. So if this was August,
Speaker 1: it would be probably a similar number. If this was
Speaker 1: June or July the Taper tantrum, you get similar numbers
Speaker 1: of that UM. March of twenty was much lower UM.
Speaker 1: In November of two it was much lower UM. So
Speaker 1: you know, it's been worse, but it's definitely not not
Speaker 1: great out there. Can we talk a little bit about
Speaker 1: March because I think that was when we first had
Speaker 1: you on and we were talking about this big sell
Speaker 1: off in the bond market, which was exactly what people
Speaker 1: didn't expect to happen when we had a huge risk
Speaker 1: off event which was the global pandemic and equities sliding
Speaker 1: and all of that. What exactly is the consensus around
Speaker 1: what happened in March of what was the issue that
Speaker 1: that whole incident exposed. So it's funny, I think if
Speaker 1: if memory stars I was supposed to talk about live
Speaker 1: or form. We talked about and I think we eventually did,
Speaker 1: like a few months later, but it like we did
Speaker 1: ye more interesting events intervened. Yeah, so this brings up
Speaker 1: a really important question, which is a liquidity versus market functioning,
Speaker 1: Like what was so much worse back then? Because the
Speaker 1: FED is unwinding their balance sheet, like you said, they're
Speaker 1: not buying three trillion dollars worth of assets over a
Speaker 1: few weeks were three trillion rather, so there's clearly a
Speaker 1: lot less sense of urgency about the impact of this
Speaker 1: illiquid episode versus the events of and And that's where
Speaker 1: I think we should be very specific about what we
Speaker 1: mean by liquidity, because what we really mean we're always
Speaker 1: feeling around. This is the different people feeling different parts
Speaker 1: of the elephant. But like once a trunk wins, one's
Speaker 1: of one's a foot, but they don't really know the
Speaker 1: whole picture. I think if we were to have the
Speaker 1: full the full picture of the market, all the participants
Speaker 1: and all of their risk tolerance and positioning, and we
Speaker 1: would really be asking this question, can I sell when
Speaker 1: there's more sellers and buyers? How much does it move
Speaker 1: the price? Um and The implication there is can I
Speaker 1: turn my treasuries into cash at a reasonable cost in
Speaker 1: a reasonable period of time at scale. And that's not
Speaker 1: just part of the fact that the treasury market is
Speaker 1: perceived as risk free and is quite large. It's built
Speaker 1: into a lot of the law. The the liquidity coverage
Speaker 1: ratio does not distinguish between treasuries and cash. I'm not
Speaker 1: a lawyer, but there's I believe a part of the
Speaker 1: I R. S Code that says you can actually pay
Speaker 1: your taxes in treasuries, which is the only financial asset
Speaker 1: you can directly pay your taxes in. So like a
Speaker 1: chart list would say, well then their money, right, And
Speaker 1: so treasuries have special status and lots of different ways.
Speaker 1: The reason they do is because it's supposed to be
Speaker 1: as close to cash as any financial asset can be.
Speaker 1: And that means I can move large size at low
Speaker 1: cost because when you when you turn your bank account
Speaker 1: into physical cash, they don't charge you a fee, right,
Speaker 1: So so I need something that's convertible into into real currency.
Speaker 1: The low cost and back in not only was depth low,
Speaker 1: but the bid esque spread in the market was a
Speaker 1: wide So what's going on now is the depth is low,
Speaker 1: but if you're able to trade, you're able to trade
Speaker 1: it roughly the biddest spread you were able to trade
Speaker 1: out a year ago, especially in benchmark issues like the
Speaker 1: tenure note back, it was three, four or five times wider.
Speaker 1: So there were no bids or offers within three levels
Speaker 1: of that market price. In fact, the market price if
Speaker 1: you don't have bids or offers within one or two
Speaker 1: ticks of the market price, then it's not really the
Speaker 1: market price. We don't really know where the market price is.
Speaker 1: And so back then market the market was not functioning,
Speaker 1: it was not just a liquid and that's where the
Speaker 1: urgency comes in. So the question is what's different now
Speaker 1: versus ben What's going on now is a revision to expectations.
Speaker 1: But more importantly, this is an environment that's served familiar
Speaker 1: in certain respects. You know, we've had inflation before, not recently,
Speaker 1: but we've had it before. We know what it is,
Speaker 1: we know why the Fed is raising rates, We have
Speaker 1: reasonable confidence around the range of potential outcomes. Will argue
Speaker 1: about where the Fed is going to stop, but we
Speaker 1: know they're going to keep raising rates until inflation comes down,
Speaker 1: and we can say three four percent, five percent but
Speaker 1: I don't think anyone's out there calling for fun trade.
Speaker 1: So these are with thein the bounds of things we've
Speaker 1: seen before. Back in it's so easy to forget just
Speaker 1: how crazy the set of uncertainties was. And like, for example,
Speaker 1: there was speculation they would just close the market for
Speaker 1: some indeterminate period of time. Right, so if the markets closed,
Speaker 1: the bidst spread is infinite because you can't transact, So
Speaker 1: if you need cash, you need to get it now.
Speaker 1: So like that creates a lot of urgency. So just
Speaker 1: going back to March for a second, and as you
Speaker 1: laid out nicely, like the law basically says treasuries are
Speaker 1: cash or very close to cash or cash like and
Speaker 1: should be treated as such. But if I recall, like
Speaker 1: with Mar, part of the issue, and part of the
Speaker 1: reason we saw these sort of extreme widening of the
Speaker 1: spread is that even though there's theoretically free money on
Speaker 1: the table for someone to come in and close these spreads,
Speaker 1: that the demand for like pure cash was so strong
Speaker 1: that nobody, no actors in any any part of the ecosystem,
Speaker 1: whether it's edge funds or banks or whatever, wanted to
Speaker 1: deploy capital, deploy balance sheet to close these spreads to
Speaker 1: take advantage of these opportunities at scale. And so is
Speaker 1: the problem or is there sort of like a core
Speaker 1: problem with Yes, we want to treat treasuries is cash,
Speaker 1: but the way we have the system set up is
Speaker 1: such that we still depend on the risk taking appetite
Speaker 1: of private investors to actually do that job in the end. Yeah,
Speaker 1: so this gets to, you know, what are these dealers
Speaker 1: actually doing? And I was I was referring to, you know,
Speaker 1: matching buyers and salaries is one function, and holding inventories
Speaker 1: the other. I'm gonna reference the SLR, the Supplementary Leverage Ratio,
Speaker 1: because it's one example of a regulation that creates a
Speaker 1: very different set of incentives for dealers that are has
Speaker 1: within banks. And what the SLR does is it makes
Speaker 1: all balance sheet count the same towards your capital requirements.
Speaker 1: It makes balance sheet to scarce commodity. And that's not
Speaker 1: necessarily a problem if it's not strictly binding, or or
Speaker 1: there's relatively too a flow meaning as many buyers as sellers,
Speaker 1: but in a one sided market where there's mostly sellers,
Speaker 1: and that's what you're referring to, the most people want cash.
Speaker 1: They don't want securities. It makes it very difficult for
Speaker 1: a dealer that's housed within a bank to hold that
Speaker 1: inventory because what what what balance sheet constraints do, what
Speaker 1: leverage constraints do, is they turn that allocation of balance
Speaker 1: sheet into a zero sum game. So when the treasury desk,
Speaker 1: for example, wants to buy that billion dollars for the
Speaker 1: tenure notes, and they are near their allocation limit. Because
Speaker 1: if you want to limit the amount of balance sheet
Speaker 1: of business uses, you just gave it everyone a limit
Speaker 1: like that's a plausible way to do it. So that
Speaker 1: that creates rigidities. And let's say they call up their manager,
Speaker 1: and they call their manager and it goes all the
Speaker 1: way up to chain. They say, I need another five
Speaker 1: billion of balance sheet because there's so many sellers. And
Speaker 1: I'm the treasury desk, I'm I'm I'm processing the most
Speaker 1: important market in the world, right, so I need I
Speaker 1: need that extra balance sheet. The reaction as well. So
Speaker 1: does the prime business, so does the credit business, so
Speaker 1: does the front end business, the short term credit desk,
Speaker 1: so does the corporate lending business where you're drawing a revolvers.
Speaker 1: So everyone's got their hand out, and that's a zero
Speaker 1: sum game in the sense that like there is a
Speaker 1: balancie allocation that the firm can use, and it it
Speaker 1: makes it very hard in practice, especially at a high frequency,
Speaker 1: like a high pace, things were moving quickly to get
Speaker 1: those allocations where they need to be when they need
Speaker 1: to be there. If you think back to that period
Speaker 1: of time, it's easy with hindsight to say, well, you
Speaker 1: know there wasn't that much selling, but you don't know that.
Speaker 1: In the moment um. It's like driving a car three
Speaker 1: hundred miles an hour towards a towards the wall with
Speaker 1: your eyes closed and like it might work out, but
Speaker 1: like it might not, and that creates a lot of hesitation.
Speaker 1: So you have what's referred to as the dash for cash,
Speaker 1: but it's really about a relative urgency to find liquid assets,
Speaker 1: not securities, not long term securities, due to this concern
Speaker 1: that one you might need that cash for something, and
Speaker 1: too they might close the market tomorrow. That's the background.
Speaker 1: I think the important thing to keep in mind as well,
Speaker 1: and I think we talked about this back. There was
Speaker 1: this push over several years to take those market making
Speaker 1: functions and in parts, split them into two parts, and
Speaker 1: push them out of the banking sector. Now this wasn't purposeful,
Speaker 1: but that was the set of incentives ever created, so
Speaker 1: that when you think about matching buyers and sellers, high
Speaker 1: frequency traders took on a lot of that responsibility, and
Speaker 1: they did that by doing very very high frequency, fast
Speaker 1: arbitrage trades to try to spread the risk around really
Speaker 1: quickly and go home with no inventory. So high frequency
Speaker 1: traders generally don't have inventory at the end of the day,
Speaker 1: so they're doing only matching like that's that's that's most
Speaker 1: of their function and they were of that on screen depth,
Speaker 1: so they were the majority of the market, but they
Speaker 1: can't operate in a high volatility environment, so they tend
Speaker 1: to The thing about h f T s it tends
Speaker 1: to actually back away if something big is happening, right
Speaker 1: like if there's a big data release, like often the
Speaker 1: machines will kind of back away from making that market
Speaker 1: until things settle down a bit. Yeah, like that at
Speaker 1: the time, if you were to if you were to
Speaker 1: look at the way the market trades in the three
Speaker 1: seconds before the payrolls number drops on monthly Fridays, and
Speaker 1: look at any day any period of that two weeks span,
Speaker 1: and just how the market is trading like it felt
Speaker 1: like payroll Friday at eight thirty all day long for
Speaker 1: two weeks. And the reason is because if you're a
Speaker 1: higher concentrator, you're trying to make those bit esque spreads.
Speaker 1: You need to sell for a dollar and and and
Speaker 1: buy it back for a little less and so like
Speaker 1: if if market markets are moving around a lot, it's
Speaker 1: really hard to monetize the spread. So there's a reason
Speaker 1: for this, but in making it more complicated and costly
Speaker 1: for bank dealers to perform that market making function. In
Speaker 1: businesses like treasuries, the h f T s stepped in
Speaker 1: to fill that need like a life finds away moment.
Speaker 1: So they step and fill the fill the need. They
Speaker 1: do a great job until things get dicey, and then
Speaker 1: that business model does not operate well when vall is
Speaker 1: very high, so they tended to jump and and and
Speaker 1: drop the size they're willing to show. Can you talk
Speaker 1: a little bit about the overall size of the treasury
Speaker 1: market as well, because we have seen the US deficit growing.
Speaker 1: I think the amount of treasuries outstanding is at something
Speaker 1: like twenty three trillion dollars at the moment, and it's
Speaker 1: gotten a lot larger in recent years. Even though the
Speaker 1: FED has been purchasing US treasuries up until recently, how
Speaker 1: does that impact ease of trading or the way the
Speaker 1: market functions. Well, the FED helps a lot when they
Speaker 1: buy half of the net supply for the past two years.
Speaker 1: So there's been sort of two things going on there.
Speaker 1: The first is the FED is really there too absorb
Speaker 1: the supply, uh. And the second is the commercial banking sector,
Speaker 1: which I believe is the sixth or seven of the
Speaker 1: US commercial banking sector, which I think is the six
Speaker 1: or seventh larger largest holder of treasuries, has been the
Speaker 1: second largest buyer over the past two years. And that's
Speaker 1: because when you grow the size of the banking system,
Speaker 1: which is what KILLI quantitative easing does, there's this natural
Speaker 1: need to find assets to support those new deposits. There's
Speaker 1: new liabilities, and so banks have stepped into to absorb
Speaker 1: a lot of supply, and there's a bunch of other
Speaker 1: components in the market that that do sort of take
Speaker 1: on a decent share of it. But the question is more,
Speaker 1: is the market too big for the intermediation capacity offered?
Speaker 1: I would argue that's probably still the case it's certainly grown,
Speaker 1: if anything, and and bank appetites to market making treasuries
Speaker 1: is not concreased. But that introduced vulnerabilities. So just because
Speaker 1: that ratio is a little off doesn't mean the whole
Speaker 1: world is going to fall apart at any moment. But
Speaker 1: when the stress hits, which is what happened in twenty,
Speaker 1: it really struggles to serve that function. And that sort
Speaker 1: brings up the second thing that that non bank dealers
Speaker 1: were doing, which is on the hedge front side. We
Speaker 1: probably talked in at the time about basis trades and
Speaker 1: and specifically holding securities levered with repo, so levered longs
Speaker 1: in treasury securities that were hedged with futures positions. There
Speaker 1: was a big position that built up over time. Cause
Speaker 1: if balance sheet, again is a scarce commodity, it's a
Speaker 1: zero sum game, then you have to sort of use
Speaker 1: it or lose it as a client. And one way
Speaker 1: to do that is to have positions that utilize a
Speaker 1: repo line. You're sort of using your line of credit,
Speaker 1: but you're hedging the risk in the futures market, and
Speaker 1: so you're not actually taking any market risk, but you're
Speaker 1: using your allocation, which looks a lot like holding inventory.
Speaker 1: What dealers tend to do is they tend to be
Speaker 1: long off the run securities off the run securities or
Speaker 1: bonds that were issued a little while ago. They're not
Speaker 1: the most recently issued security. That's what long term holders
Speaker 1: tend to have, like stuff that was issued a while
Speaker 1: ago when they sell it. Deals hold that inventory, and
Speaker 1: they hedge in the futures market. On the hedge fund side,
Speaker 1: there was a position that built up which was pretty passive,
Speaker 1: mostly designed to use it rather than lose it on
Speaker 1: balance sheet, and that looked a lot like inventory. And
Speaker 1: so you have these two functions of matching trades performed
Speaker 1: by h f t s and holding inventory performed by
Speaker 1: hedge funds. That was a brittle arrangement because it was
Speaker 1: basically taking the market making capacity and allocating it away
Speaker 1: from banks to relatively unregulated institutions who are not subject
Speaker 1: to the SLR, for example. And what happens in that
Speaker 1: whole system comes crashing down because of a variety of
Speaker 1: operational and market related concerns that basically make it untenable
Speaker 1: to hold those basis positions and very difficult to operate
Speaker 1: a high frequency trading operation. And so you have all
Speaker 1: of this intermediation capacity that's in principle provided by non banks,
Speaker 1: all of a sudden disappears, and if when the banks
Speaker 1: are asked to take on the slack, they simply can't
Speaker 1: do it for a reasonable price, which is why this
Speaker 1: whole arrangement came to be in the first place, and
Speaker 1: so the market stops functioning. Can I just ask, is
Speaker 1: this sponsored repo? So this is just repo in general?
Speaker 1: Some of it sponsored sponsored repo is definitely worth talking
Speaker 1: about in terms of some of the solutions that are
Speaker 1: proposed to this issue of intermediation capacity, But this is
Speaker 1: just repo funded positions in general, sponsor and otherwise, Okay,
Speaker 1: shall we talk a bit about sponsored repo in that case,
Speaker 1: because this is talking about dealer's ability to intermediate the
Speaker 1: market being perhaps too small or too constrained versus what's
Speaker 1: going on there. And as you say, one of the
Speaker 1: solutions to this issue has been the idea of sponsored repo,
Speaker 1: which I think basically I wrote about this years ago,
Speaker 1: so I can't remember everything, but I think it basically
Speaker 1: allows banks to transact with counterparties like hedge funds without
Speaker 1: necessarily bumping up against balance sheet constraints, and I think
Speaker 1: they get it from the f d I C or no, sorry,
Speaker 1: from the f I c C from Thick. Yeah. So
Speaker 1: if the issue is balance sheet is a zero sum game,
Speaker 1: then if you can increase the amount of balance sheet
Speaker 1: that's being passed around the balantie capacity of banks, then
Speaker 1: you've addressed the problem in part. So there's a couple
Speaker 1: of ways to do that. The first is you can
Speaker 1: just change the rules, right, and that's that's what the
Speaker 1: Fed actually did on a temporary basis. They made a
Speaker 1: temporary change to the supplementary leverage ratio that said, if
Speaker 1: you're if it's or its treasury is on balance sheet,
Speaker 1: which is an important distinction, but if the cash your treasuries,
Speaker 1: it doesn't count anymore or for at least a year.
Speaker 1: And the idea that was to create capacity, right because
Speaker 1: now the size of my balance sheet I used for
Speaker 1: that supplementary leverage ratio is just smaller, and certain things
Speaker 1: don't contribute to that number, so I can do more
Speaker 1: of them. In principle, that was the theory. That doesn't
Speaker 1: necessarily work that way in practice, but you know, it's
Speaker 1: a separate thing. So one way to do this is
Speaker 1: to change the rules, change the game. The other way
Speaker 1: you can do it is played a little differently, and
Speaker 1: so you know, one thing that was proposed very quickly
Speaker 1: after after the crisis in was to introduce a broad
Speaker 1: clearing mandate for the treasury market. And the logic for
Speaker 1: that was, on the one hand, it reduced settlement risk
Speaker 1: by having all of these transactions go through a central counterparty,
Speaker 1: so it will be less likely that securities, for example,
Speaker 1: I could not be found in time, have less failures
Speaker 1: to deliver, which in principle has an impact on uncertain
Speaker 1: capital requirements and so forth. But you know, the more
Speaker 1: interesting from my perspective, impact of that was that in
Speaker 1: the repo market, if you were to clear all those trades,
Speaker 1: the impact of central clearing is, say everyone's facing the
Speaker 1: same counterparty. They're all facing fix, which is the clearing house. Um,
Speaker 1: it's the same way it works in derivatives markets, where
Speaker 1: everyone faces the CME because they're all there, all their
Speaker 1: derivative exposures, all those contracts are novated or transferred to
Speaker 1: a central counterparty that serves as the other side to
Speaker 1: every trade, and so like they're naturally off setting because
Speaker 1: every derivative markets are definitionally zero sum, and so they
Speaker 1: have all the positions they can. They can match off
Speaker 1: trades and reduce the overall through credit risk embedded in
Speaker 1: derivative contracts. So in the in the treasury market, the
Speaker 1: idea was, well, what if everybody just faced thick And
Speaker 1: that has a couple of implications, but one of the
Speaker 1: most important is that when they banks measure their balance sheet.
Speaker 1: One of the ways they do that in repo markets,
Speaker 1: as they say, am I facing the same counterparty? So
Speaker 1: if you borrowed with the left and lent with the right,
Speaker 1: you're kind of economically neutral. But if you do that
Speaker 1: facing different counterparties, then they both contribute or one of
Speaker 1: them contributes to to the leverage. And and that's because
Speaker 1: those two trades can see each other in principle. But
Speaker 1: if everyone's facing the same counterparty, then they can. And
Speaker 1: so the idea there was, well, banks will get balance
Speaker 1: sheet relief and elasticity, meaning they can grow their exposures
Speaker 1: as needed because there'll be lots of offsets in the
Speaker 1: way you measure leverage, and if you can count all
Speaker 1: your economic offsets in your regulatory exposure, then that ratio
Speaker 1: is less binding, which is like a lot of technical
Speaker 1: ways to say, you know, a central counterparty will reduce
Speaker 1: the amount of letg. You have to show from your
Speaker 1: regulatory requirements. Why can't they just make those rules the
Speaker 1: one year your rule where they said treasuries are equill cash,
Speaker 1: why not just make that permanent, especially since other parts
Speaker 1: of the law indicate that, and as you mentioned, like
Speaker 1: you can pay your taxes with treasuries, So why not
Speaker 1: just if so many parts of the law say treasuries
Speaker 1: are cash, why not just have that be a permanent
Speaker 1: part of bank regulations. Well, people have made that argument.
Speaker 1: It's an ongoing debate as to other treasuries to be excluded.
Speaker 1: It would be a little difficult in the context of
Speaker 1: international standards to exclude treasuries and not be a little
Speaker 1: out of out of the mainstream. But certainly cash at
Speaker 1: the FED is one of those things that people argue
Speaker 1: shouldn't be included. And one way to think about that
Speaker 1: is if you get a lot of how might can
Speaker 1: re line of credit right, and you take a hundred
Speaker 1: thousand dollars out and you take that hundred thousand dollars
Speaker 1: you put in the bank account and keep it there.
Speaker 1: Don't do anything with it. So you always have cash
Speaker 1: in the bank to pay down the loan, but you
Speaker 1: still have the loan. Has your credit gone down? Are
Speaker 1: you less credit worthy now as a consequence of doing that?
Speaker 1: Because if you're if you're you want, if you have
Speaker 1: a new liability and you have cash to back it,
Speaker 1: you're you're sort of not really necessarily reducing your your
Speaker 1: credit quality as a borrower, right, And so should you
Speaker 1: have to hold more capital against that position is kind
Speaker 1: of the lot the question, and and a lot of
Speaker 1: jurisdictions or some jurisdictions have said, well, you shouldn't write
Speaker 1: you are no longer, You're not less safe for sound
Speaker 1: as a consequence of having more cash on the treasury side.
Speaker 1: You know, people have argued, well that that has interest
Speaker 1: rate risk associated with it. It's not purely fungible, it's
Speaker 1: not purely cashless. Look what happened in you might have
Speaker 1: a market functioning issue. But this is like an ongoing debate,
Speaker 1: which is what's the proper measure of size for a bank?
Speaker 1: Because the need to think about size constraints in general
Speaker 1: is something that the Bossle Committee is very focused on
Speaker 1: and and regulators are very focused on. After after the
Speaker 1: two eight crisis. But you know how you measure that size,
Speaker 1: what actually should contribute to that size measurement? How big
Speaker 1: are you really and how risky are you really? Is
Speaker 1: an ongoing source of debate. But the clearing question what
Speaker 1: what's interesting there? I think And an important to note
Speaker 1: is it's not a matter of direction, meaning you know,
Speaker 1: if you were introduced to clearing mandate, the amount of
Speaker 1: balantie allocated to tripo, like the amount of balanceie size
Speaker 1: you'd show, would go down questions how much, And that's
Speaker 1: where sponsored repo comes in, which is clearing is available
Speaker 1: currently and there's a decent chunk of the market that's
Speaker 1: actually cleared already, and so you know, it's not obvious
Speaker 1: and and there's lots of ways, lots of reasons to
Speaker 1: think that it would likely not meaningfully improve the leverage
Speaker 1: constraints that banks are facing. That that is is a
Speaker 1: very very mild self for what is otherwise a much
Speaker 1: more acute problem. So we don't necessarily have a clearing
Speaker 1: mandate in US treasury trading the way we do for derivatives,
Speaker 1: where trades have to go through a central counterparty, but
Speaker 1: we do have sort of some clearing going on in
Speaker 1: the market through for instance, um if I SEC and
Speaker 1: other ways, rather than just announce a total clearing mandate,
Speaker 1: is there a way to incentivize market participants to do
Speaker 1: more clearing voluntarily. Well, those incentives are there in the price.
Speaker 1: So at times, for example, if you're a cash lender,
Speaker 1: it's been advantageous to do that in a cleared format,
Speaker 1: to do that via sponsored like banks will essentially pay
Speaker 1: up a little bit to incentivize you to do that,
Speaker 1: and the same is true on the borrower side. And
Speaker 1: so like, this kind of balance sheet optimization work is
Speaker 1: something that the larger institutions have gotten quite good at,
Speaker 1: and they know how to price trades to sort of
Speaker 1: push people or nudge them in the direction that benefits
Speaker 1: their regulatory constraints, so that in that sense, like people
Speaker 1: are acting economically, the issue is not so much you know,
Speaker 1: can we push people in that direction? It's more you know,
Speaker 1: what direction do they want to face? And by that
Speaker 1: I mean when when rates are rising? Right for example, Now,
Speaker 1: the way the hedge funds position for that is they
Speaker 1: don't do repos which is a way to buy secure
Speaker 1: by treasuries on using leverage. It's they do rostary buds,
Speaker 1: which is you're going short the market, right, that's how
Speaker 1: you position for rising rates, and so that creates netting inefficiencies,
Speaker 1: which basically means you can't net off trades on the
Speaker 1: on the borrower versus the lender side because there are
Speaker 1: simply less borrowers out there. So you know, the the
Speaker 1: amount of netting you can do in your book goes
Speaker 1: down as a consequence of the positioning of the hedge
Speaker 1: fund and speculative industry, those who are trying to short
Speaker 1: treasuries and so in practice that actually makes a bigger
Speaker 1: difference than the availability is sponsored trades. So it's not
Speaker 1: about access to clearing as much as this is about
Speaker 1: you know, do people think rates are going up or down?
Speaker 1: Which is hothing you obviously can't control. Going back to
Speaker 1: the present tense and you know, obviously March was an
Speaker 1: extraordinary situation. I mean truly, Uh you know, maybe hopefully
Speaker 1: once in a lifetime or once in a century, what
Speaker 1: we've seen more recently should not be that rare. And
Speaker 1: you know it's gonna happen multiple times probably in our
Speaker 1: careers that people are surprised in a significant way by
Speaker 1: the direction of the market. Because that's what markets do.
Speaker 1: What are the lessons here and what you know, how
Speaker 1: bad is it that you know, we saw we have
Speaker 1: this lack of depth, that we have this gap between
Speaker 1: treasuries that are you know, on the run versus off
Speaker 1: the run treasuries and so forth, And is it something
Speaker 1: that needs to be fixed? Is it something that you
Speaker 1: know when you look at this lack of depth needs
Speaker 1: some sort of like policy or architectural solution. Yeah, I
Speaker 1: think the it's important not to oversolve for the problem. So, like,
Speaker 1: as an example, if you have a plate and you
Speaker 1: think it's cracked, and then you smash it on the
Speaker 1: ground and it breaks along the crack, you've confirmed that
Speaker 1: it was cracked, but that doesn't mean you should only
Speaker 1: have plastic plates, right, So, like that's not the right
Speaker 1: level of stress to solve for. And in a lot
Speaker 1: of ways is the smashing of the plate and and
Speaker 1: that it's usually going to break it. And that's because
Speaker 1: it's extremely unusual. It is unique in lots of respects.
Speaker 1: And yes, you could probably say that about any crisis,
Speaker 1: but it's important to recognize that, like, we should not
Speaker 1: be creating or designing a treasury market that is specifically
Speaker 1: calibrated to survive a once in century pandemic liquidity squeeze.
Speaker 1: That that is not the right level of of of
Speaker 1: of rigor. And I think it's likely we can't do
Speaker 1: that within reasonable constraints, Like there's a lot of reasons
Speaker 1: to think that even in the absence of of leverage constraints,
Speaker 1: even in the absence of of other issues, would have
Speaker 1: been a mess in lots of ways regardless, So it's
Speaker 1: unclear that we could actually have avoided that fate. The
Speaker 1: but the question is do we want a more resilient
Speaker 1: treasury market. I think they're The answer is very much yes.
Speaker 1: It's important when we think about that if we go
Speaker 1: through the list of reforms that have been proposed, to
Speaker 1: think more in terms of like what is the what
Speaker 1: is the quantitative impact, like how much is this going
Speaker 1: to help? Not will it help? How much will it
Speaker 1: help to reduce the fragilities in a system that that
Speaker 1: under much less extreme circumstances, how has exhibited a lot
Speaker 1: of a lot of frailty. And and that comes back
Speaker 1: to this issue of disincentivizing banks from taking on high leverage,
Speaker 1: low risk positions. Among those are RIPO and treasury intermediation
Speaker 1: and to to say that there's a lot of reasons.
Speaker 1: And this goes all the way back to the the
Speaker 1: Fed Treasury cord in I teen fifties, where like the
Speaker 1: proper function of the treasuring market is is a is
Speaker 1: a matter of of national importance, like the the economy
Speaker 1: requires it and so and it needs to be robust
Speaker 1: to modest shocks or even significant ones. And so you know,
Speaker 1: the question is when we, for example, include reserves in
Speaker 1: the in the leverage rat show. And the reason why
Speaker 1: I'm talking about cashing out treasuries is that you know,
Speaker 1: capital is fungible, right, you have some capital requirement, and
Speaker 1: if you create more space relative to minimums, if you
Speaker 1: make sure the supplement or leverage ratio is really a
Speaker 1: backstop rather than a binding constraint, then you have space
Speaker 1: to do other activity that would otherwise consume balance sheet.
Speaker 1: And and one of those treasury trading. You know, we
Speaker 1: have to think about and and the Ft has been
Speaker 1: quite clear that they are thinking about this. Whether now
Speaker 1: the banking system is less safe and sound is a
Speaker 1: consequence of a higher reserve balance, and whether that's the
Speaker 1: right way to think about capital requirements and safety and
Speaker 1: sound is. So that's on the regulatory side, and then
Speaker 1: on the market structure side. You know, there are certain
Speaker 1: ways in which you could reduce these procyclical tendencies. And
Speaker 1: one of the things I like to highlight is cross margining.
Speaker 1: It was cross margining in back in the ball was
Speaker 1: very high and in those basis positions, the two legs
Speaker 1: of the trade were margined separately. And by margin separately,
Speaker 1: I mean that the tread the margin had to post
Speaker 1: against the futures leg was based on an outright exposure.
Speaker 1: The margin had to post against the cash leg. The
Speaker 1: securities was an outright exposed based on raisin posed and
Speaker 1: they couldn't see each other, so you could be sort
Speaker 1: of well hedged, but still have to post margin on
Speaker 1: both sides of your heads because those those two hedges
Speaker 1: were margined independently. That sounds like a technical nuance. Why
Speaker 1: am I talking about that in the context of like
Speaker 1: changes to the overall structure the banking system. It's because
Speaker 1: that creates post prosec locality back in and at that time,
Speaker 1: the futures margins increased by several times very quickly, and
Speaker 1: that naturally delivers the entire financial system, because if you
Speaker 1: have to post more cash against a position, you get
Speaker 1: less leverage. And you know that might be desirable under
Speaker 1: normal times. I'm like, I say it's necessarily desirable. You
Speaker 1: might want less leverage in the system, you might want more,
Speaker 1: but reducing it rapidly during a period of stress is
Speaker 1: sort of the factor problematic, both in in practical terms
Speaker 1: because you gotta find that cash, but also like the
Speaker 1: signaling value that it's it's important to keep in mind
Speaker 1: if margins get tripled and no liquidations actually come as
Speaker 1: a result of that, no one liquidates positions, they find
Speaker 1: the cash elsewhere. You can still trade the market like
Speaker 1: there might be liquidations, and and then it sort of
Speaker 1: has the same impact. And you can you can see
Speaker 1: that in part from the commodities experience in the past
Speaker 1: few months, is there was this concern that margin requirements
Speaker 1: were going to be We're going to force liquidations of
Speaker 1: positions and and and that just creates a whole the
Speaker 1: whole mess. So you know, one of the things you
Speaker 1: can do is you can say, look, if you're well
Speaker 1: hedged on an economic basis, you shouldn't have to post
Speaker 1: as much margin. And that just reduces the pro cyclical
Speaker 1: dynamic that the margin cycle introduces um and it makes
Speaker 1: the market sort of more resilient to volatility shocks. You
Speaker 1: mentioned how the FED is thinking about these issues, and
Speaker 1: I think they published a couple of papers on this topic.
Speaker 1: But why it doesn't the FED feel compelled to intervene
Speaker 1: because clearly it's comfortable unwinding it's balance sheet. This is
Speaker 1: just to play Devil's Advocate, by the way, but it's
Speaker 1: comfortable unwinding it's balance sheet. It's comfortable, I don't want
Speaker 1: to say abandoning forward guidance, but certainly surprising the market
Speaker 1: as it recently. What do they see here that maybe
Speaker 1: market participants don't or where does the difference in opinion
Speaker 1: come from? Well, I think this comes back to the
Speaker 1: question of is it a liquid or is it not functioning?
Speaker 1: And this is where I think the the somewhat hyperventilating
Speaker 1: language that traders often use is not terribly helpful. So, like,
Speaker 1: the number of times anyone has been told their face
Speaker 1: has been ripped off is like, probably not the right
Speaker 1: number of times relative to how like intense that image is,
Speaker 1: And so things are not I guess, And that's that
Speaker 1: bad because transaction costs are manageable like if if risk
Speaker 1: is is clearing, if you can get the trade done,
Speaker 1: you can do it at relatively tight but offer at
Speaker 1: least in the current issue that most recently issued bonds,
Speaker 1: So like in that sense, the market is functioning. The
Speaker 1: high freaksity traders have stayed involved much more so than
Speaker 1: than prior volatility episodes. There have been some structural changes
Speaker 1: to them, to the way these markets operate, and one
Speaker 1: of the big advancements since has been the rise of
Speaker 1: what what are are called bilateral streams or private central
Speaker 1: limit order books, where you know, the issue with broker
Speaker 1: techt is when you put it in order, everyone can
Speaker 1: see it, even if they don't know who put it in.
Speaker 1: Whereas these bilateral streams and private order books allow you
Speaker 1: to string prices directly to specific clients so you don't
Speaker 1: have to tip your hand in the same way. And
Speaker 1: that that sounds like a small change, but it makes
Speaker 1: it makes the showing of bigger size in general much easier,
Speaker 1: so markets are more resilient. As consequence, that's become a
Speaker 1: much more common way to trade inter dealer that then
Speaker 1: was the case even a year ago. The question is
Speaker 1: why are yields actually going up and is that bad
Speaker 1: um And if you're the FED, you want to tighten
Speaker 1: financial conditions presumably, so rising yields are not prima facial problem.
Speaker 1: I feel like a dealer inventory is they're pretty low.
Speaker 1: If you look at the way the RepA market is trading,
Speaker 1: it suggests a scarcity of collateral. It's just's not enough
Speaker 1: funds in the system rather than too many. What's probably
Speaker 1: happening here is speculative investors are going short the market
Speaker 1: in the way I describe through reverse repos more so
Speaker 1: than real money, and users of securities of treasury bonds
Speaker 1: were actually selling them, and so that's a lot less concerning, right,
Speaker 1: So on the one hand, you're kind of getting the
Speaker 1: macroeconomic outcome you want, and on the other you don't
Speaker 1: have the outflows from from the real firm hands in
Speaker 1: the market at the nearly the same scale you had
Speaker 1: in twenties. So the need of the FED to take
Speaker 1: those bonds out of the system is a lot less
Speaker 1: because they're floating around in the levered complex anyways. It's
Speaker 1: not like you have long term holders looking to liquidate
Speaker 1: and no one on the other side. You take it
Speaker 1: all together and like, what what if I was at
Speaker 1: the FED way to be concerned. Absolutely, you know, low
Speaker 1: levels of depth, high levels of all, a very uncertain
Speaker 1: macroeconomic environment and policy environment are all reasons for concern.
Speaker 1: But would I'd be convinced that not only are markets
Speaker 1: functioning poorly, but that they are not functioning to the
Speaker 1: point where this could create other contagion effects in the
Speaker 1: financial system and necessitates basically sucking the Venomo out, which
Speaker 1: is what those market functioning purchases were. We're definitely not there.
Speaker 1: I mean, we're we're very far away from that kind
Speaker 1: of thing, so, you know, in that sense, it's a
Speaker 1: familiar kind of stress, which is still no fun, but
Speaker 1: it is not the kind of existential angst created by
Speaker 1: by the environment of existential angst. That's a good way
Speaker 1: of describing it. Josh, We're going to have to leave
Speaker 1: it there. I feel like we could talk to you
Speaker 1: for another hour on this topic. But thank you so
Speaker 1: much for coming on all thoughts. That was great, that
Speaker 1: was great feedback. Thanks for having yea. Thanks John so Joe.
Speaker 1: I feel like existential angst is a really good way
Speaker 1: of putting the experience of and that's when we did
Speaker 1: see some momentum towards actually addressing of problems that Josh's
Speaker 1: outlining in the world's most important market. But it does
Speaker 1: feel like, absent a major crisis, these issues just kind
Speaker 1: of like limp along. Yeah, I think that's right. And
Speaker 1: you know, it's not some of this stuff. It's not
Speaker 1: the end of the world per se. It's not an
Speaker 1: imminent crisis. But because it is the world's most important market,
Speaker 1: there are reasons to be concerned when you see some
Speaker 1: of these lack of liquidity or the fragmentation that he discussed.
Speaker 1: You know, the thing that gets me is it feels
Speaker 1: like there are so many different moving parts that work
Speaker 1: cross purposes. You have some laws that say treasury should
Speaker 1: be cash, other laws that say banks can't get too big.
Speaker 1: You have other situations in which expansive FED balance sheet
Speaker 1: helps liquidity. On the other hand, the Fed feels it
Speaker 1: needs to shrink its balance sheet for its monetary policy purposes,
Speaker 1: which are all those You have all these different things
Speaker 1: that each individually may have some logic, but it's the
Speaker 1: confluence of all of them that see where the problems
Speaker 1: seem to create. I think that's exactly right. Also, something
Speaker 1: I didn't know up until recently do you know REPO
Speaker 1: contracts are apparently exempt from the automatic stay of bankruptcy.
Speaker 1: That was something Paul Vulker did. What does that mean?
Speaker 1: So it means if a company goes bankrupt, they're like
Speaker 1: repo assets don't automatically get frozen and then distributed to creditors. So, like,
Speaker 1: you know, if you want to treat treasuries like cash.
Speaker 1: On the other hand, if someone has a treasury that
Speaker 1: they've used as REPO collateral in a bankruptcy, wouldn't necessarily
Speaker 1: be distributed. Sorry, I'm getting really interest, but speak to
Speaker 1: the issues. That's exactly right. Yeah, do we want to
Speaker 1: treat them like cash or do we not? And should
Speaker 1: we actually have it holistic approach towards the market? They
Speaker 1: have to all all the regulators and policy authorities just
Speaker 1: have to get in the same room. And it's like,
Speaker 1: let's get on the same Yeah, okay, well, well we'll
Speaker 1: make that happen. I'm sure. Should we leave it there?
Speaker 1: Let's leave it there. This has been another episode of
Speaker 1: the All Thoughts podcast. I'm Tracy Alloway. You can follow
Speaker 1: me on Twitter at Tracy all the Way and I'm Joe.
Speaker 1: Why isn't though You can follow me on Twitter at
Speaker 1: the Stalwart. Follow our producer Carmen Rodriguez on Twitter She's
Speaker 1: at Kerman Arman, and follow all of our podcast is
Speaker 1: Bloomberg under the handle at podcasts. Thanks for listening.