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Speaker 1: Hello, and welcome to another edition of the aw Thoughts Podcast.

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Speaker 1: I'm Tracy Alloway and I'm Joe. Wasn't so, Joe, what's

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Speaker 1: the one topic that I enjoy talking about more than

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Speaker 1: anything else? I was gonna say, Actually, I wish you're

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Speaker 1: here to say more than anything else. I wish you

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Speaker 1: would just left in it. What's the one topic I

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Speaker 1: enjoy talking about? Because I kind of feel like with

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Speaker 1: a lot of our recent episodes, it's like, all right,

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Speaker 1: we're doing this topic that I really don't care about

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Speaker 1: and forced myself to learn about. They're all interesting topics, Joe,

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Speaker 1: It's just I feel like I'm immediately on the back

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Speaker 1: foot when we're doing poker or chess or anything like that,

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Speaker 1: or sports and games in general. But it is true

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Speaker 1: that you have one topic that you regularly like coming

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Speaker 1: back to and always really enjoy. I'll let you. I'll

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Speaker 1: let you bring it up. Sure, alright. So the topic

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Speaker 1: is the bond market, and specifically bond market structure, right,

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Speaker 1: the history of the bond market, how it actually works.

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Speaker 1: As we've explored in multiple post posts episodes on this podcast,

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Speaker 1: it's very complicated and far more sort of uh, far

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Speaker 1: more many structural issues arise that, say the stock market,

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Speaker 1: which to some extent I think people get how the

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Speaker 1: stock market works. Yeah. So the analogy that people often use,

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Speaker 1: at least when it comes to the corporate bond market

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Speaker 1: is to say that it's it's kind of like the

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Speaker 1: stock market in say THEES and that a lot of

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Speaker 1: it still trades by appointment and over the phone. But

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Speaker 1: on the other hand, you have the government bond market,

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Speaker 1: the treasury market, and that has actually shifted to some

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Speaker 1: electronic trading quite well, I don't know if you'd say rapidly,

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Speaker 1: but quite significantly. But then again, on the other hand,

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Speaker 1: the credit market is still stubbornly old fashioned, pretty impressive

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Speaker 1: in its own way. Yes, yeah, okay, so we know

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Speaker 1: we're going to talk about that today, but what what

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Speaker 1: are we going to talk about specifically? All right, Well,

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Speaker 1: I'm really excited because to talk about the bond market,

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Speaker 1: we've tapped someone who's been in the bond market for

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Speaker 1: decades and who works at Bloomberg. So probably well, I

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Speaker 1: was gonna say, probably somebody who's seen a lot of changes,

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Speaker 1: but per yourt changes, all right, Well, we'll have to

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Speaker 1: ask him whether or not there have been any changes.

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Speaker 1: So we're going to talk to Rob Elson. He is

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Speaker 1: an analyst on Bloomberg First Word, and he covers the

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Speaker 1: bond market day in and day out. Let's do it, Rob,

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Speaker 1: Thank you so much for joining us. Good morning. You know,

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Speaker 1: I just introd you saying that you've been in the

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Speaker 1: market for many decades now, but you had a kind

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Speaker 1: of interesting career path into bonds. Is that the right

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Speaker 1: way to put it? Um? Yes, after college, I went

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Speaker 1: to law school for about twenty minutes and was immediately drafted.

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Speaker 1: Um the nanosecond after I dropped out. Um, So this

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Speaker 1: would have been in the sixties seventies, right, It would

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Speaker 1: have been in law school, and then seventy in the Army,

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Speaker 1: the last year of which was an interesting year in Vietnam.

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Speaker 1: And when I came back to the States after that,

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Speaker 1: my college roommate who had legitimately I might had been

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Speaker 1: four ha legitimately had been working in New York and

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Speaker 1: then quit that I was traveling in Europe, got back

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Speaker 1: to New York about the same time I did, and

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Speaker 1: he said, Hey, I've tried this work stuff. It's not

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Speaker 1: such a big deal. I'm going across country. Want to come?

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Speaker 1: And I figured well, better to do it before I

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Speaker 1: start working. So we spent six thousand miles going across

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Speaker 1: country somehow and wound up on a little island called

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Speaker 1: Vashon in Puget Sound off the coast of Seattle. And

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Speaker 1: that was a very interesting year. And after that I

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Speaker 1: came back to New York and looked for a job.

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Speaker 1: One of the women I had went to college with

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Speaker 1: had a connection at what was then First National City Bank,

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Speaker 1: and I went in for an interview in the guy

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Speaker 1: who was going to interview me wasn't available, and basically

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Speaker 1: sat me down with a guy who had turned out

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Speaker 1: was a treasury bond salesman. I'm sitting at his desk

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Speaker 1: for about thirty seconds or a minute or so, his

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Speaker 1: phone rings. Uh. He goes yep, yep, and looks across

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Speaker 1: the trading room and yells to buddy you or whatever

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Speaker 1: the guy's name was at the time. Bid fifty six

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Speaker 1: is for American Road, which was their code for Ford

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Speaker 1: Motor Company back in those days. And the guy yelled

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Speaker 1: the number back at him, and he repeated it into

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Speaker 1: the phone and then sort of flicked his finger at

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Speaker 1: the guy on the other side of the room and

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Speaker 1: said yep, thanks very much and hung up the phone

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Speaker 1: and I said, what just happened? And he said, I

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Speaker 1: sold fifty million six month treasury bills to Ford Motor Company.

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Speaker 1: And I said to myself, oh, I could do that.

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Speaker 1: As it turned out, I could, but you don't really

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Speaker 1: get to be very good at until a year or

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Speaker 1: two goes by. But you got the job, right. I

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Speaker 1: got the job so real quickly. What strikes me already

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Speaker 1: about this story is, you know, when I think of

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Speaker 1: people trying to get into Wall Street these days, I

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Speaker 1: think of people who for years have had the ambition

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Speaker 1: of getting into Wall Street. Maybe they studied some business

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Speaker 1: and some math and technical stuff and internship took all

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Speaker 1: kinds of sort of licensing. Like it seems like there's

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Speaker 1: this model person who really tries to get it into

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Speaker 1: finance and check all the boxes. And I get the

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Speaker 1: impression from your story and other stories that we've heard

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Speaker 1: at the time that it was definitely a bit more

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Speaker 1: informal that people with more sort of unusual diverse backgrounds.

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Speaker 1: And I'm saying that from a sort of experience and

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Speaker 1: education standpoint could find their way in. Is that fair

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Speaker 1: to characterize it that way? It's absolutely correct. There was literally,

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Speaker 1: I think one masters amongst the people that I worked with,

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Speaker 1: and I think he had a master's and something like

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Speaker 1: geology or something. There was no such thing as an

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Speaker 1: NBA that anybody in the bond market knew anything about internships.

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Speaker 1: The only introduction to this that I had was sitting

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Speaker 1: at this guy's desk. I had no idea what the

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Speaker 1: bond market was other than it was sort of like

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Speaker 1: the stock market, and that was it. U one of

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Speaker 1: the fell those I worked with, and by the way,

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Speaker 1: who was times I am working with again here at

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Speaker 1: Bloomberg actually came out of a seminary, dropped out of

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Speaker 1: a seminary and it became became a bound salesman, So

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Speaker 1: very very different times. It was sort of you know,

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Speaker 1: if you knew somebody who knew somebody to get you

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Speaker 1: in the door, you had a shot at an interview

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Speaker 1: and then whatever happened happened. So what was trading actually

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Speaker 1: like when you started and how did you find it?

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Speaker 1: Was it hard or was it easy for you? I

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Speaker 1: don't really remember, except to say that I think instinctively

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Speaker 1: I knew that I didn't know anything, and so what

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Speaker 1: I did when I started covering people who were real

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Speaker 1: clients and had real experience and managed money and knew

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Speaker 1: what they were doing. I wouldn't pretend that I knew

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Speaker 1: what I was doing. But if the first guy I

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Speaker 1: spoke to in the morning said something something smart or

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Speaker 1: what I took to be smart, I would rearrange it

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Speaker 1: and repeat it to the second guy. And then the

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Speaker 1: second guy would either agree or sometimes say no, that's

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Speaker 1: not right because of x y Z. So I could

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Speaker 1: go back to the first guy and say, well, what

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Speaker 1: about x y Z? And slowly, slowly you begin to

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Speaker 1: figure out what's important. And you know, when the FED

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Speaker 1: does something, what does that mean? And it was just

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Speaker 1: a different world at that time. What were the characteristics

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Speaker 1: of a good bond trader or a good bond salesman?

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Speaker 1: What did the people who are really good at it

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Speaker 1: versus the people who are sort of mediocre at adverse

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Speaker 1: to people who are let go? What did those really

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Speaker 1: top ones possessed? Question? And I have an interesting response.

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Speaker 1: When I started as a trainee, it was unknown as

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Speaker 1: to whether I would wind up in sales or trading.

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Speaker 1: And one day the head trader called me up on

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Speaker 1: the trading desk and sat me down next to him,

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Speaker 1: and you know, I picked up the phone and listened

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Speaker 1: to his phone calls. And at one point he picked

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Speaker 1: up a phone to one of the brokers and got

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Speaker 1: a run of let's say, two year notes. And so

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Speaker 1: the guy was saying, uh, fifteen sixteen twenty on the November's,

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Speaker 1: on the November's, And the trader just said, uh, I'll

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Speaker 1: buy the October's, sell the November's. And then he picked

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Speaker 1: up a handful of tickets and tossed them to be

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Speaker 1: and said, write the tickets. And well, yes, I had

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Speaker 1: been listening into the phone call. I really didn't pick

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Speaker 1: up quickly enough to know what I was supposed to

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Speaker 1: be buying and selling. And I think that was my

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Speaker 1: holding my feet to the fire, and that was my test.

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Speaker 1: And then I was in sales. The guys who were traders,

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Speaker 1: the good guys, they had some instinct about it. They

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Speaker 1: they just knew in their fiber that something was getting

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Speaker 1: overbought or oversold, the market was getting ahead of itself,

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Speaker 1: or they could read that when a big portfolio came

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Speaker 1: in and bored or sold something, they knew what was

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Speaker 1: going to happen next. I don't think it was a

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Speaker 1: skill that you could learn very easily. These guys really

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Speaker 1: just did it from the gut and off the top

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Speaker 1: of their heads, and in some cases were amazing money makers.

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Speaker 1: So Rob, I want to move on to the evolution

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Speaker 1: of the bond market over the last few decades. But

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Speaker 1: before we do, what's the most interesting or remarkable thing

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Speaker 1: that happened to you during your career. Is there one

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Speaker 1: sort of incident that stands out? I think it was

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Speaker 1: seventy four. I had started in October of seventy one,

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Speaker 1: I think it was four. Interest rates were high, although

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Speaker 1: not as high as they would go, and the Treasury

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Speaker 1: would auction UH coupons where they had already set what

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Speaker 1: the coupon was going to be, and so there were

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Speaker 1: what came to be called the front nine and the

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Speaker 1: back nine. Of course, everybody played golf in those days.

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Speaker 1: In any event, I think it was the nines of

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Speaker 1: seventy seven and the nine And we're at the morning

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Speaker 1: meeting and I literally pounded on the conference room table

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Speaker 1: and I said, nobody's going to buy these. Everybody thinks

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Speaker 1: they're gonna wait, and you're gonna get ten percent if

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Speaker 1: we take a position in these. We're making a big mistake.

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Speaker 1: Don't do it. I'm telling you, don't do it. And

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Speaker 1: the boss looked at the senior salesman and said the

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Speaker 1: end of the world speech, and that's what it was.

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Speaker 1: And I gave them the information that things were so

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Speaker 1: bleak that nobody knew what was going to happen. And

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Speaker 1: they went and bought as many as could at the

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Speaker 1: time of both auctions, and the market went straight up,

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Speaker 1: and yields dropped something like a hundred basis points, and

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Speaker 1: it went up being a big home run for them.

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Speaker 1: And I always try and remember that, particularly when I'm

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Speaker 1: looking at charts about where we are now. Interest rates

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Speaker 1: have been going down for a very very long time,

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Speaker 1: and and yes we're higher than we were, you know,

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Speaker 1: from the old time lows, but still when you look

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Speaker 1: at a long term chart, we have barely budged off

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Speaker 1: the bottom. I think. I don't know whether they'll live

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Speaker 1: to see it or not, but I think that one

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Speaker 1: of these days, somewhere down the road, the FED will

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Speaker 1: tighten in a way that will take the breadth away

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Speaker 1: of market participants, and we will have a bear market

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Speaker 1: that will just amaze people. I don't think there are

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Speaker 1: very many people left who really have ever seen a

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Speaker 1: real bear market? Right, I was just going to point

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Speaker 1: out for listeners who aren't aware that essentially bonds have

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Speaker 1: been in a ball market now, you know, over thirty

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Speaker 1: five years. I mean, there have been some ups and

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Speaker 1: downs during that time, but for over three decades bonds

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Speaker 1: have been in a ball market. So what does that mean.

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Speaker 1: I mean, if we do get you know, as you say,

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Speaker 1: maybe it's a FED induced move, that it creates a

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Speaker 1: real bear market, not like this little like sell off

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Speaker 1: that we've had since last summer. What will be the

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Speaker 1: ramifications from the fact that so many, so few people

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Speaker 1: in the space these days have ever seen a bear market. Well,

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Speaker 1: it's not just that they've never seen a bear market,

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Speaker 1: it's also that the whole structure of the dealer can

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Speaker 1: unity has changed. People have serious risk limits and serious

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Speaker 1: position limits. The banks obviously have capital requirements that were

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Speaker 1: not in play over the years. So the question is

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Speaker 1: do the big dealers have the ability to stand there

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Speaker 1: and buy securities when they're going down by not one

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Speaker 1: or two basis points, by perhaps five or ten basis

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Speaker 1: points at a time. And I think that's a big question. Ultimately,

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Speaker 1: in theory, the FED will have to be there is

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Speaker 1: the buyer of last resort, or at least that was

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Speaker 1: how it used to be. I suppose we could ask

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Speaker 1: the question, how many people are left at the fed um,

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Speaker 1: the open market desk who really have had, you know,

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Speaker 1: that experience. So is the issue with the market right now?

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Speaker 1: On the one hand, you have the shrinking of the

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Speaker 1: dealer balance sheets, their ability, their appetite to take risk.

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Speaker 1: Supposedly a lot of people argue with that point, by

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Speaker 1: the way, But at the same time, the way that

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Speaker 1: bonds are traded hasn't really changed. You know, you still

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Speaker 1: need to pick up the phone to someone. You still

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Speaker 1: need to put an order in. It's not like the

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Speaker 1: stock market that's highly liquid, where you can just enter

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Speaker 1: orders electronically. Is that the issue the dichotomy? Well, I

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Speaker 1: think that the conversations between clients and dealers has diminished.

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Speaker 1: Uh not for the big guys, um, the black Rocks

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Speaker 1: and the Goldman's presumably still talk daily to each other.

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Speaker 1: But for the vast majority of clients it's all electronic

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Speaker 1: mm hm. Electronic communication, you mean, and electronic trading. You

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Speaker 1: don't call up Bob Elson anymore and say you bid

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Speaker 1: fifty million two year notes. You know, you just do

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Speaker 1: it on the screen and you hit the enter and

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Speaker 1: you hit a bit. It's right there in front of

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Speaker 1: you and you see a trade. Yeah. I was just

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Speaker 1: going to ask about that. So obviously we talked about

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Speaker 1: the sort of you know, the changing rates market and

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Speaker 1: some of how different it is these days from a

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Speaker 1: technical standpoint. When did you start to see a change

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Speaker 1: in the way bonds themselves were dealt? What kind of

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Speaker 1: when did you start to notice this shift? And uh,

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Speaker 1: what hasn't changed or what would you have expected to

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Speaker 1: have changed by now that the industry is really holding

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Speaker 1: out on tell rate. I think was the first screen,

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Speaker 1: and I guess that was in the late mid to

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Speaker 1: late seventies, maybe later than that. This is all all

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Speaker 1: pre computer and pre Bloomberg. There was just nothing like

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Speaker 1: that after the world Bloomberg. Yes, I know, I know,

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Speaker 1: and I will tell you that when I first started

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Speaker 1: using Bloomberg and realized how much was there and how

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Speaker 1: much could be there, I would send the message to

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Speaker 1: Mr Bloomberg with the subject line being idea of the day,

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Speaker 1: and he always picked up his own messages back then,

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Speaker 1: and I'd say, you know, the money supply figures come

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Speaker 1: out on Thursday. But by the way, dealer positions also

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Speaker 1: come out, and you really should pick up dealer positions.

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Speaker 1: And lo and behold, one of his elves called and said,

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Speaker 1: what are dealer positions? And how do I find them?

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Speaker 1: And I drew him a little diagram and he figured

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Speaker 1: it out, and there it is. There's a function in

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Speaker 1: Bloomberg that I can take responsibility for. Everything had been

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Speaker 1: on a personal level. Everything you spoke to good clients

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Speaker 1: multiple times a day, and everything was done on the phone,

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Speaker 1: and your word was your bond. Everything or a big

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Speaker 1: percentage of things is now all done electronically with less

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Speaker 1: and less human contact. Is there? As I can tell,

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Speaker 1: when we get to the bear market, will the dealers

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Speaker 1: just turn off the machine and not show prices and

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Speaker 1: not be able to be hit? And nobody knows. So

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Speaker 1: what's the one piece of advice you have for treasury

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Speaker 1: investors right now? Well, the one piece of advice for

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Speaker 1: everybody always is take the high road and know what

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Speaker 1: you know and know what you don't know, and don't

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Speaker 1: confuse the two. And I've always felt because of the

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Speaker 1: way I was treated by senior people who had no

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Speaker 1: business spending time with me because I didn't know what

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Speaker 1: I was talking about. I always felt like that I

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Speaker 1: owed it to the next group coming up, and so

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Speaker 1: I've always tried to spend time mentoring, if you will,

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Speaker 1: or at least helping out younger people, which is basically

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Speaker 1: every everybody. Now, all right, Rob Elson, BFW Analysts, thank

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Speaker 1: you so much for joining us today. My pleasure. So, Joe,

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Speaker 1: was that as interesting as poker or chest for you?

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Speaker 1: I thought it was very interesting and probably we should do,

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Speaker 1: you know, tilt this back towards a series of these.

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Speaker 1: I really do like this topic, and I'm particularly fascinated

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Speaker 1: by the cultural change aspect and the idea that the

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Speaker 1: industry wasn't once is sort of I don't know. It

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Speaker 1: strikes me a sort of conformist and everyone sort of

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Speaker 1: goes to the same path. And so hearing about Rob

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Speaker 1: driving across the country and then living on an island

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Speaker 1: off a Puget Sound for a year and then being

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Speaker 1: able to move from that into the bond world, uh,

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Speaker 1: sounds very cool and very much more positive vision than

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Speaker 1: people going straight from prep school to their ivy league NBA. Yeah,

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Speaker 1: you can't really imagine someone kind of wandering and off

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Speaker 1: the Goldman and asking to be a bond salesman now.

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Speaker 1: And it's also interesting, you know, this idea of you know,

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Speaker 1: we talked in the stock market, there's so much focus

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Speaker 1: on passive management and everyone wants to you know, robo

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Speaker 1: advisors and just set it and forget it. But that

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Speaker 1: whole period hasn't really seen a bear market yet, so

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Speaker 1: who knows if people are really going to stick with

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Speaker 1: passive the next time there's like a true crash, And

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Speaker 1: so very similar to what Rob was talking about, slightly different,

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Speaker 1: but we really don't know how people are going to

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Speaker 1: behave when there's a true bond market. We just have

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Speaker 1: no sell off. Yeah, that's absolutely right. And of course

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Speaker 1: the bond market US treasury yields in particular underpin pretty

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Speaker 1: much everything else in financial market, so you could see

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Speaker 1: this massive repricing. Of course, people have been predicting it

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Speaker 1: for a long time, so we might be we're still waiting.

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Speaker 1: It could be in ten years from now when we're

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Speaker 1: doing this, we could still be this podcast, which I'm

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Speaker 1: sure it will be in ten years. Of course, we

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Speaker 1: might still be talking about this topic of when it

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Speaker 1: comes All right, well, let's revisit it in what sounds good.

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Speaker 1: Looking forward to it all right, I'm Tracy Alloway. You

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Speaker 1: can follow me on Twitter at Tracy Alloway and I'm

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Speaker 1: Joe wi Isn't all You could follow me on Twitter

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Speaker 1: at the Star Wars. Thanks for listening. The Year E