WEBVTT - US Treasury Says It Was Breached by Chinese-Based Hacker 0:00:02.400 --> 0:00:06.720 Bloomberg Audio Studios, podcasts, radio news. 0:00:07.520 --> 0:00:11.800 No, you're listening to the Bloomberg Intelligence Podcast. Catch us 0:00:11.840 --> 0:00:14.800 live weekdays at ten am Eastern on Apple Car playing 0:00:14.840 --> 0:00:17.919 Android Auto with the Bloomberg Business app. Listen on demand 0:00:17.920 --> 0:00:22.680 wherever you get your podcasts, or watch us live on YouTube. 0:00:23.280 --> 0:00:27.200 Remember, they notify the Treasury Department notified lawmakers just yesterday 0:00:27.320 --> 0:00:31.520 that a China state sponsored actor infiltrated workstations. And what, 0:00:31.800 --> 0:00:33.960 as you've been saying, the officials are now calling a 0:00:34.000 --> 0:00:36.440 major incident. We're going to bring in Jamie Tarabay, who 0:00:36.440 --> 0:00:41.120 covers cybersecurity for Bloomberg. How do you see what happened 0:00:41.320 --> 0:00:45.440 to the Treasury Department compared to what we've seen in 0:00:45.600 --> 0:00:52.120 other hacks that were facilitated by Chinese actors, state sponsored actors. 0:00:52.159 --> 0:00:54.920 It's almost like another day, another hack. Quite frankly, at 0:00:54.960 --> 0:00:59.760 this point, we have been dealing with years of whites 0:01:00.120 --> 0:01:04.640 read long running hacking campaigns, whether there's a cyber espionage 0:01:05.240 --> 0:01:09.480 or prepositioning in the possible events of a conflict with Taiwan. 0:01:09.600 --> 0:01:13.480 But we have seen just literally years and years and 0:01:13.560 --> 0:01:18.760 years of attempts and intrusions and compromises of American and 0:01:18.920 --> 0:01:23.759 international critical infrastructure networks by Chinese state sponsored hacking. So 0:01:24.400 --> 0:01:29.640 this is something that has been happening for years, and 0:01:28.640 --> 0:01:32.559 the more obvious and the more we talk about these things, 0:01:32.560 --> 0:01:37.200 the more the expectation is that we expect minimum cybersecurity 0:01:37.240 --> 0:01:41.240 standards from not just the private sector, but from government agencies, 0:01:41.400 --> 0:01:43.800 especially one as critical as US Treasury. 0:01:45.080 --> 0:01:49.200 What's the expectation as to the defenses of some of 0:01:49.240 --> 0:01:54.040 these government agencies. Is the belief that the US government 0:01:54.080 --> 0:01:57.520 has decent cybersecurity defenses or not? 0:01:58.920 --> 0:02:01.280 You know, that's a really complicate a question because a 0:02:01.280 --> 0:02:04.120 lot of the time, a lot of these federal government 0:02:04.200 --> 0:02:08.760 agencies depend on contract with third party providers where they 0:02:08.800 --> 0:02:12.320 have devices that often they're called end of life, so 0:02:12.560 --> 0:02:18.600 they're routers or they're interconnected devices that basically connect networks together, 0:02:19.080 --> 0:02:23.200 and they haven't been updated or they are obsolete and 0:02:23.240 --> 0:02:27.120 they need to be changed. And because bureaucracy and the 0:02:27.120 --> 0:02:32.600 federal government is so large, it's always a challenge, it 0:02:32.600 --> 0:02:35.760 always costs money, and it always is a big undertaking. 0:02:36.040 --> 0:02:38.839 So we are seeing more and more and more of 0:02:38.880 --> 0:02:42.120 these end of life products being compromised. We know more 0:02:42.320 --> 0:02:45.160 about the fact that these are entry points in a 0:02:45.200 --> 0:02:50.000 lot of different hacking campaigns, So it's really we want 0:02:50.040 --> 0:02:52.760 to see more cybersecurity audits. We would love to see 0:02:52.800 --> 0:02:56.480 more transparency from federal government agencies about what they're doing 0:02:56.520 --> 0:03:01.040 in terms of shoring up their systems, using the party providers, 0:03:01.320 --> 0:03:06.160 using incident response, using cybersecurity firms, as well as deploying 0:03:06.680 --> 0:03:10.920 agencies like CISA, the FBI, and other agencies that are 0:03:11.000 --> 0:03:15.440 concerned with cybersecurity, particularly as we know and has been 0:03:15.480 --> 0:03:19.320 said repeatedly by government officials for years now, that there 0:03:19.320 --> 0:03:23.359 are Chinese attempts and actions to get into our systems 0:03:23.400 --> 0:03:30.600 to basically have access to inspectual property and you know, 0:03:31.400 --> 0:03:34.200 as well as intelligence gathering purposes. 0:03:34.639 --> 0:03:37.520 By the way, the Chinese embassy in Washington says it 0:03:37.600 --> 0:03:43.160 opposes quote smear attacks against China without any factual basis. 0:03:43.160 --> 0:03:45.960 They say the US needs to stop using cybersecurity to 0:03:46.080 --> 0:03:48.960 smear and slander China and stop spreading all kinds of 0:03:49.000 --> 0:03:52.600 disinformation about the so called Chinese hacking threat. 0:03:53.480 --> 0:03:55.320 How sure are we about. 0:03:55.000 --> 0:04:00.160 This stuff, because I think it's a huge allegation. It 0:04:00.160 --> 0:04:03.200 could be construed as an act of war. Frankly, hacking 0:04:03.440 --> 0:04:07.080 the Department of Justice, the Department of defense the Treasury. 0:04:07.920 --> 0:04:14.360 So is it firmly, you know, evidenced that the Chinese, 0:04:14.400 --> 0:04:16.640 that Chinese state hackers are behind this stuff. 0:04:17.480 --> 0:04:20.320 I think the phrasing of the letter that Treasury is 0:04:20.400 --> 0:04:24.560 sent to Senator job Brown and sim Scott were basically 0:04:24.600 --> 0:04:27.600 saying that they had denoted it as a major cyber 0:04:27.760 --> 0:04:30.800 security incident, which is what they do when they attribute 0:04:30.800 --> 0:04:33.080 it to a state sponsored actor. And the fact that 0:04:33.120 --> 0:04:37.479 they said that after the investigations by government agencies, the 0:04:37.680 --> 0:04:42.479 attribution is crystal clear makes it extremely definitive. They would 0:04:42.520 --> 0:04:45.120 not be putting that in a letter to Congress if 0:04:45.160 --> 0:04:49.360 they weren't sure, and it's it would probably it would 0:04:49.400 --> 0:04:54.320 meet the hahollmarks and trade craft of previous Chinese hacking attempts. 0:04:54.600 --> 0:04:58.000 So there are indicators of compromise. There are tactics and 0:04:58.120 --> 0:05:03.279 procedures that these hackers would be using that are about 0:05:03.440 --> 0:05:06.080 our identifiable to the people. 0:05:05.720 --> 0:05:06.520 Who track them. 0:05:06.920 --> 0:05:10.800 And there are also companies like Microsoft that have visibility 0:05:10.839 --> 0:05:13.640 over the Internet and watch certain threat actors as they 0:05:13.680 --> 0:05:16.320 move across networks, and they're able to recognize their patterns 0:05:16.320 --> 0:05:19.279 of behavior as well as the places that they're in gering. 0:05:19.480 --> 0:05:22.800 The Treasury Department was notified by on December eighth by 0:05:22.920 --> 0:05:28.040 a third party provider. They notified Congress on December thirtieth. 0:05:27.800 --> 0:05:30.280 By the way, ironically called beyond Trust. 0:05:30.640 --> 0:05:32.080 You can say that act right. 0:05:32.040 --> 0:05:34.839 Yes, yes, yes, that is that. There is an irony 0:05:34.880 --> 0:05:37.279 to that. But the three week lags is what I 0:05:37.279 --> 0:05:39.680 want to ask about here. Why do they wait so 0:05:39.800 --> 0:05:43.560 long to notify law makers for such an important government body. 0:05:44.320 --> 0:05:46.839 That's a great question, you know, we would love to know, 0:05:47.120 --> 0:05:50.520 and right now we're not getting that information from Treasury. 0:05:50.920 --> 0:05:54.120 A lot of the times, when particularly this past year, 0:05:54.160 --> 0:05:56.360 you would have heard about Salt Typhoon and Vault Typhoon, 0:05:56.440 --> 0:06:00.680 which are extensive hacking campaigns, a lot of the communication 0:06:00.760 --> 0:06:04.040 companies that have been impacted have not disclosed those hacks 0:06:04.080 --> 0:06:08.479 because they've been getting waivers on a national security basis 0:06:08.800 --> 0:06:11.599 that they would have agreed on with the intelligence community, 0:06:11.600 --> 0:06:15.440 with the government. So if they have not been able 0:06:15.480 --> 0:06:18.960 to declare or disclose those hacks, it's for myriad reasons, 0:06:18.960 --> 0:06:21.760 including national security, but also they want to be sure 0:06:22.640 --> 0:06:24.520 that they know what they have. They also want to 0:06:24.560 --> 0:06:27.640 probably be able to say that they have eradicated the problem, 0:06:27.680 --> 0:06:31.040 that they've mitigated any kind of compromise and that they're 0:06:31.279 --> 0:06:33.719 able to sort of say we found it, we've detected it, 0:06:33.800 --> 0:06:35.080 we're dealing with it. It's over. 0:06:36.520 --> 0:06:39.560 Jamie, thanks so much for joining us, Jamie Terrabay reporting 0:06:39.680 --> 0:06:41.000 on that incident. 0:06:41.320 --> 0:06:43.920 And it is the one that we know about. There 0:06:43.920 --> 0:06:44.880 are others. 0:06:44.720 --> 0:06:47.640 Perhaps that we don't because Beyond Trust said that a 0:06:47.680 --> 0:06:52.239 limited number of customers Plural were involved in this hack, 0:06:52.320 --> 0:06:55.440 and they also have contracts with the Department of Defense, 0:06:55.600 --> 0:06:58.760 with the Department of Justice, with the Department of Veterans Affairs. 0:07:00.480 --> 0:07:02.039 It could be those. 0:07:01.880 --> 0:07:04.080 Other agencies haven't gotten back to us and havn't a 0:07:04.120 --> 0:07:05.839 learned in Congress as far as we know that they 0:07:06.000 --> 0:07:09.800 were affected as well. And Paul, as you point out, 0:07:09.960 --> 0:07:12.160 this really makes you rethink the TikTok issue. 0:07:12.200 --> 0:07:13.840 That's kind of the issue I thought about when I 0:07:13.840 --> 0:07:16.720 was reading the story today, was this has put the 0:07:16.800 --> 0:07:19.160 TikTok issue, which is Supreme Court Presembly will take a 0:07:19.200 --> 0:07:21.120 look at soon. Does I put it in a different 0:07:21.200 --> 0:07:23.720 light for some people? And I suspect it will because 0:07:23.960 --> 0:07:27.320 who's to say, what's China state versus China private. 0:07:27.800 --> 0:07:30.360 I don't have a clear understanding of that. And isn't 0:07:30.400 --> 0:07:32.800 that the same. I think it is for a lot 0:07:32.800 --> 0:07:33.280 of issues. 0:07:33.280 --> 0:07:35.600 And yeah, ill thing about this too is the Treasury 0:07:35.600 --> 0:07:37.960 Department around that time December eighth, there was a lot 0:07:38.000 --> 0:07:40.679 of issue in since then, and there was a lot 0:07:40.720 --> 0:07:43.440 of remember wrangling around the debt ceiling and the US 0:07:43.480 --> 0:07:47.000 fiscal situation. You know, what kind of interference was there 0:07:47.440 --> 0:07:50.320 and can they show that there wasn't a significant enough 0:07:50.360 --> 0:07:55.400 interference to markets? Was there any It's hard to understand 0:07:55.440 --> 0:07:58.000 really what the ramifications are from the hack itself. 0:07:58.120 --> 0:07:59.840 Yeah, absolutely, I think there's still a lot to on 0:08:00.080 --> 0:08:00.480 pack here. 0:08:02.040 --> 0:08:05.920 You're listening to the Bloomberg Intelligence Podcast. Catch us live 0:08:06.000 --> 0:08:09.520 weekdays at ten am Eastern on applecar Play and Android 0:08:09.560 --> 0:08:12.320 Auto with the Bloomberg Business app. You can also listen 0:08:12.440 --> 0:08:15.520 live on Amazon Alexa from our flagship New York station, 0:08:15.920 --> 0:08:18.679 Just say Alexa play Bloomberg eleven thirty. 0:08:19.240 --> 0:08:20.360 Ronica Clark Joints US. 0:08:20.880 --> 0:08:24.160 She's a director of research and the US economists over 0:08:24.160 --> 0:08:26.480 there at that little bank on the quarter called City 0:08:26.560 --> 0:08:32.240 Bank Veronica. What's your twenty twenty five message to your 0:08:32.400 --> 0:08:34.679 city clients about this US economy? 0:08:35.040 --> 0:08:35.240 Yeah? 0:08:35.320 --> 0:08:39.199 Yeah, I liked the previous discussion of the very bifurcated economy. 0:08:39.240 --> 0:08:41.520 I think that we're experiencing where we're lower income people 0:08:41.720 --> 0:08:44.920 are certainly struggling higher income consumers or maybe what is 0:08:44.960 --> 0:08:47.880 supporting you aggregate consumption. But I do think this is 0:08:47.880 --> 0:08:50.240 a very precarious economy, and that's I think the message 0:08:50.280 --> 0:08:51.080 for twenty. 0:08:50.880 --> 0:08:52.559 Twenty five for our of you. 0:08:52.679 --> 0:08:54.599 It really does come down, I think, to weakness that 0:08:54.640 --> 0:08:57.120 we're seeing in the labor market, and I do worry 0:08:57.120 --> 0:08:59.160 that the FED has maybe gotten a bit complacent on 0:08:59.200 --> 0:09:02.000 that labor market weakening. And we do think that this 0:09:02.040 --> 0:09:03.640 is a FED that's going to be cutting rates a 0:09:03.679 --> 0:09:06.240 lot more than market's currently priced in twenty twenty five. 0:09:07.240 --> 0:09:09.160 The FED is going to cut rates more than is 0:09:09.200 --> 0:09:12.360 currently priced in twenty twenty five. So you're not worried 0:09:12.400 --> 0:09:16.400 about policy driven reinflation next year. 0:09:16.960 --> 0:09:18.319 Yeah, not particularly. 0:09:18.360 --> 0:09:21.000 I think a lot of the fundamental drivers that you know, 0:09:21.200 --> 0:09:23.400 we've seen of inflation over the last couple of years 0:09:23.400 --> 0:09:26.160 do look a lot better even compared to a year ago. 0:09:26.240 --> 0:09:28.839 Even just this morning we got case Shiller home price data. 0:09:29.480 --> 0:09:32.480 Home prices are running at a normal, pre pandemic kind 0:09:32.480 --> 0:09:35.319 of pace that doesn't seem like a future source of inflation. 0:09:35.360 --> 0:09:37.640 And that's really where you would see signs of re 0:09:37.679 --> 0:09:40.640 emerging inflation if rates were too low. We do see 0:09:40.640 --> 0:09:43.520 the labor market weakening. That means that wage growth has load. 0:09:43.559 --> 0:09:45.920 The labor market doesn't seem like a source of inflationary 0:09:45.920 --> 0:09:48.360 pressure anymore. I do think there's a lot of ways 0:09:48.360 --> 0:09:50.520 that we can see something that looks more like two 0:09:50.520 --> 0:09:52.120 percent inflation in twenty twenty five. 0:09:52.760 --> 0:09:55.200 So one thing I wonder about a lot, too, is 0:09:55.400 --> 0:09:57.959 you said that bifurcation in the economy and in your 0:09:58.000 --> 0:10:02.960 kind of already hinting at potential further pains ahead. There 0:10:03.040 --> 0:10:05.319 was a great point made earlier today by Danielle di 0:10:05.480 --> 0:10:07.840 Martino Booth that you might see some of those kind 0:10:07.840 --> 0:10:11.160 of middle to upper income consumers also start feeling some pain. 0:10:11.480 --> 0:10:13.880 Some of that pain might be seen as early as 0:10:14.000 --> 0:10:16.040 the coming days when you look at kind of student 0:10:16.120 --> 0:10:20.400 loan repayment rates. For example, housing prices are still high, 0:10:20.760 --> 0:10:22.960 cost of rent is still high. I mean, how do 0:10:23.040 --> 0:10:26.520 you think about that drift higher in terms of the 0:10:26.559 --> 0:10:31.040 pain that consumers will be feeling into twenty twenty five. 0:10:31.520 --> 0:10:33.679 Yeah, I do think that's what we've seen, you know, 0:10:33.800 --> 0:10:36.240 very gradually happening over the last year or so. 0:10:37.080 --> 0:10:38.240 You know, a lot of aggregate. 0:10:38.320 --> 0:10:42.160 You know, measures of consumer health really don't look very comforting. 0:10:42.640 --> 0:10:45.160 We have the savings rate which is below pre pandemic levels, 0:10:45.160 --> 0:10:48.959 and falling consumer delinquencies on credit cards, auto. 0:10:48.720 --> 0:10:51.120 Loans, you know, they're above twenty nineteen levels. 0:10:51.720 --> 0:10:54.319 Yes, you know, student loans haven't been counted as defaulted yet, 0:10:54.320 --> 0:10:55.720 but they will start to be soon. 0:10:55.800 --> 0:10:57.280 Those do have to start being repaid. 0:10:57.960 --> 0:11:00.680 I do think the fundamental driver of whether people are 0:11:00.720 --> 0:11:03.040 going to continue spending is if you have a job 0:11:03.160 --> 0:11:05.640 or not. And of course the unemployment rate is still 0:11:05.640 --> 0:11:07.960 at a healthy level, but it's been trending higher and 0:11:08.080 --> 0:11:10.720 hiring has been very weak. If we do get to 0:11:10.720 --> 0:11:12.839 that stage where people are starting to lose their jobs, 0:11:12.880 --> 0:11:14.760 that I think really would get people to cut back 0:11:14.800 --> 0:11:15.360 on spending. 0:11:16.040 --> 0:11:17.800 What do you think drive drives that? 0:11:17.960 --> 0:11:22.400 I mean, what pushes companies to I guess if there's 0:11:22.400 --> 0:11:25.439 no GDP growth, they're not going to need to keep hiring. 0:11:25.480 --> 0:11:28.679 If there is lower revenue for these big corporations, they 0:11:28.720 --> 0:11:29.640 won't need more people. 0:11:30.160 --> 0:11:31.640 Yeah, I mean, yeah, absolutely. 0:11:31.720 --> 0:11:34.600 We've had you know, two to three percent GDP growth 0:11:34.600 --> 0:11:36.559 for a couple of years, and still the unemployment rate 0:11:36.559 --> 0:11:39.240 has risen by almost a percentage point from from the lows. 0:11:39.840 --> 0:11:41.880 Hiring is very weak, it's at mid two thousand and 0:11:41.880 --> 0:11:44.679 eight kind of rates. So we already see that businesses 0:11:44.679 --> 0:11:46.360 are trying to cut labor costs, and I do think 0:11:46.400 --> 0:11:49.600 that's a result of maybe trying to offset high borrowing costs. 0:11:49.600 --> 0:11:52.520 You know, rates are still restrictive if people do start 0:11:52.520 --> 0:11:54.680 to cut back on spending anymore. You know, if that's 0:11:54.760 --> 0:11:57.480 less business revenue, and you've already been looking for every 0:11:57.480 --> 0:12:00.559 way to cut labor costs by not hiring or reducing hours, 0:12:00.760 --> 0:12:03.280 that might get you to layoffs. We've also seen people 0:12:03.320 --> 0:12:07.199 are not quitting as much, probably for worry of finding 0:12:07.240 --> 0:12:10.640 a new job. That might mean that lack of voluntary 0:12:10.640 --> 0:12:13.720 separations might turn into involuntary separations. So there are definitely 0:12:13.720 --> 0:12:15.600 ways that you can get to that layoff stage. 0:12:16.200 --> 0:12:18.079 Given that back job Ronica, how much do you think 0:12:18.080 --> 0:12:19.319 the FED could cut? 0:12:19.360 --> 0:12:22.360 How many times in twenty twenty five, we. 0:12:22.360 --> 0:12:24.640 Think one hundred and twenty five basis points, so that's 0:12:24.679 --> 0:12:27.400 five twenty five basis point cuts. Of course, that's much 0:12:27.440 --> 0:12:29.280 more than what the market is pricing right now. 0:12:29.960 --> 0:12:33.040 So how much then are you worried about the spillover 0:12:33.080 --> 0:12:36.520 effects because we've had investors tell us that, Okay, a 0:12:36.520 --> 0:12:39.080 lot of the assumptions when it comes to stock market 0:12:39.120 --> 0:12:44.120 predictions for next year are really predicated on sufficient growth. 0:12:44.520 --> 0:12:48.079 But between what you're saying about potential weaknesses and consumers 0:12:48.520 --> 0:12:53.360 and also what you might expect from the Trump government 0:12:53.520 --> 0:12:58.160 in terms of efficiency seeking and bond vigilantes just calming 0:12:58.240 --> 0:13:01.920 after the bond market, potentially, if the fiscal situation does 0:13:01.920 --> 0:13:05.040 not improve, all of this put together, does it signal 0:13:05.120 --> 0:13:07.920 that growth is potentially compromised. 0:13:08.720 --> 0:13:10.440 Yeah, yeah, I think it does. 0:13:10.559 --> 0:13:13.280 I mean, we're expecting something like one percent average growth 0:13:13.280 --> 0:13:16.120 for next year. I do think you'll fundamentally if we 0:13:16.160 --> 0:13:17.839 look back at the last couple of years, you. 0:13:17.760 --> 0:13:19.240 Know, I do think rates are restrictive. 0:13:19.600 --> 0:13:23.040 We've had such substantial fiscal support post pandemic, and that 0:13:23.160 --> 0:13:26.040 was the immediate post pandemic, you know, policies, but also 0:13:26.080 --> 0:13:29.120 in Placial Reduction Act and infrastructure, and that is going 0:13:29.160 --> 0:13:31.600 to be fading. You know, in twenty twenty five. We'll 0:13:31.640 --> 0:13:34.840 see if we do get further cuts to government spending. 0:13:35.320 --> 0:13:38.160 But that fiscal impulse is flat to maybe negative for 0:13:38.240 --> 0:13:40.680 next year and rates are still restrictive, This could be 0:13:40.720 --> 0:13:42.600 the time that it finally catches up with us. 0:13:42.800 --> 0:13:44.280 Well, if they cut down one hundred and twenty five 0:13:44.320 --> 0:13:47.960 basis points, we're at three percent even on the lower bound, 0:13:48.120 --> 0:13:53.040 and that should be I would say pretty stimulative. Victoria 0:13:53.160 --> 0:13:55.480 or Veronica, Sorry, thanks so much for joining us. Veronica 0:13:55.480 --> 0:13:59.400 Clark there is the city director of Research and US Economists, 0:13:59.400 --> 0:14:01.960 talking to us about her expectations for twenty twenty five. 0:14:02.000 --> 0:14:04.200 Happy New Year to all of you. 0:14:04.920 --> 0:14:08.800 You're listening to the Bloomberg Intelligence podcast. Catch us live 0:14:08.880 --> 0:14:11.959 weekdays at ten am Eastern on Apple car Playing androud 0:14:12.000 --> 0:14:15.120 Otto with the Bloomberg Business app. Listen on demand wherever 0:14:15.160 --> 0:14:19.440 you get your podcasts, or watch us live on YouTube. 0:14:20.080 --> 0:14:22.480 I want to turn to the big take story on 0:14:22.520 --> 0:14:25.680 the Bloomberg terminal this morning. As the US debt we've 0:14:25.680 --> 0:14:31.480 been talking about balloons in the direction of fifty trillion dollars. 0:14:31.520 --> 0:14:34.640 Treasury bond dealers are warning of the risk of growing 0:14:34.880 --> 0:14:38.320 market pressures. Joining us now is Bloomberg's Alex Harris, who 0:14:38.320 --> 0:14:42.000 has more on this story. And Alex, some of the 0:14:42.080 --> 0:14:44.480 numbers here were shocking even to me and I cover 0:14:44.920 --> 0:14:49.560 you know this market every day, But treasury issuances one 0:14:49.760 --> 0:14:53.720 nat West executive told you has tripled over the past decade. Meanwhile, 0:14:53.800 --> 0:14:57.240 the balance sheets of these banks aren't catching up. So 0:14:57.880 --> 0:15:00.160 being a primary dealer an easy these days. 0:15:01.400 --> 0:15:04.280 No, And you know, you look at Citadel in this case, 0:15:04.360 --> 0:15:07.120 and they had been buying to become a primary dealer 0:15:07.160 --> 0:15:10.200 for years and finally in September said, you know what, thanks, 0:15:10.280 --> 0:15:13.280 but no thanks. This is just a losing proposition. And 0:15:13.360 --> 0:15:15.640 I think that's how people are feeling about it now 0:15:15.880 --> 0:15:19.080 and why you're not seeing the primary dealer community even 0:15:19.200 --> 0:15:22.240 grow to keep up with the amount of supply and 0:15:22.280 --> 0:15:24.720 the amount of debt that the government is issuing. And 0:15:24.760 --> 0:15:27.800 that's a problem because you need those primary dealers. You 0:15:27.920 --> 0:15:31.280 need them to facilitate these you know, in these markets 0:15:31.320 --> 0:15:35.080 from the auctions to secondary market. And remember their balance 0:15:35.120 --> 0:15:37.920 sheets for these dealers isn't just treasuries. It's a lot 0:15:37.960 --> 0:15:40.720 of other things. It's equities, it's mortgage backed securities, it's 0:15:40.760 --> 0:15:43.360 asset back secures. So you're playing with all these things. 0:15:43.640 --> 0:15:45.560 And as you can see what happened if you look 0:15:45.600 --> 0:15:48.560 back to March twenty twenty, I mean, that's a really 0:15:48.600 --> 0:15:51.000 good example of what happened when the treasury market ceased 0:15:51.000 --> 0:15:53.880 to function and dealer balance sheets just could not handle 0:15:54.360 --> 0:15:57.800 what it needed to do across all asset classes, and 0:15:58.160 --> 0:16:01.040 that's the very thing that it's a regular returns. 0:16:01.120 --> 0:16:03.360 Maybe let's take a large step back for a moment here, 0:16:03.480 --> 0:16:05.760 because there are a lot of confusing dynamics that are 0:16:05.760 --> 0:16:07.960 happening in the treasury market. One is the size of 0:16:08.000 --> 0:16:11.440 the US DOT load alone. Then there comes the plumbing 0:16:11.680 --> 0:16:16.600 questions why overnight funding seems to hit pockets of stress 0:16:16.840 --> 0:16:20.120 every so often, the dealer balance sheets being constrained as 0:16:20.120 --> 0:16:23.160 they are, as you say, and then hedge funds trading 0:16:23.240 --> 0:16:27.320 with a lot of leverage in this system. What is 0:16:27.440 --> 0:16:30.680 actually the problem here and the risk in the way 0:16:30.720 --> 0:16:32.080 the plumbing is working. 0:16:32.640 --> 0:16:36.040 So right now, what's happening and where the primary dealers 0:16:36.080 --> 0:16:39.520 are having problems is when you're asked to facilitate and 0:16:39.600 --> 0:16:42.800 intermediate in this market, but you don't have the balance 0:16:42.840 --> 0:16:46.280 sheet to do it. You have to charge higher funding costs. 0:16:46.280 --> 0:16:48.640 So that means if you are looking to borrow treasuries, 0:16:48.680 --> 0:16:51.000 say in the rebo market, and you're a hedge fund 0:16:51.080 --> 0:16:52.960 or an asset manager and you need to borrow to 0:16:53.080 --> 0:16:57.800 finance securities, you're going to have to pay more. And 0:16:57.880 --> 0:17:00.280 there might be a point where they are not to 0:17:00.320 --> 0:17:03.280 pay as much as the dealers are asking them, and 0:17:03.320 --> 0:17:06.280 so that's when you get backstops and you get you know, 0:17:06.560 --> 0:17:09.040 stopping out of positions, and all of that has to 0:17:09.080 --> 0:17:11.800 make its way back onto the dealer balance sheets, and 0:17:11.840 --> 0:17:14.640 so that's where they get clogged. And right now there's 0:17:14.680 --> 0:17:18.760 four hundred billion in aggregate treasuries alone sitting on dealer 0:17:18.840 --> 0:17:22.320 balance sheets. And then every time you get a treasury 0:17:22.359 --> 0:17:24.520 settlement cycle, so the middle of the month and the 0:17:24.600 --> 0:17:27.359 end of the month, you're getting a backup in repo rates. 0:17:27.400 --> 0:17:30.440 It's becoming a regular occurrence and we're seeing it quite often. 0:17:30.560 --> 0:17:31.040 This year. 0:17:31.400 --> 0:17:35.960 July, dealer balance sheets were stuck. End of September was 0:17:36.000 --> 0:17:40.000 a very volatile quarter end that nobody expected. Your end 0:17:40.000 --> 0:17:43.679 has thankfully been really today it's very mild. Repo is 0:17:43.760 --> 0:17:46.920 under control. But it's because the minute the calendar turned 0:17:46.920 --> 0:17:49.840 to October, everybody said, wait a minute, we have to 0:17:49.880 --> 0:17:52.399 be better prepared for this. And so you saw repo 0:17:52.520 --> 0:17:54.840 rates actually back up to five and a half percent 0:17:54.880 --> 0:17:57.680 in the middle of November because people said, I want 0:17:57.680 --> 0:17:59.840 to get caught. I got to do this now. 0:18:00.080 --> 0:18:04.200 And so Alex, another question about this too. We're talking 0:18:04.200 --> 0:18:06.880 about the treasury market here. It's not only the deepest 0:18:06.880 --> 0:18:09.360 most liquid market in the world, it's one of the largest, 0:18:09.440 --> 0:18:12.080 and it also underpins the cost of every other type 0:18:12.080 --> 0:18:15.639 of borrowing. And if you're talking about the need to 0:18:16.000 --> 0:18:19.000 kind of back up rates as you're talking about in 0:18:19.040 --> 0:18:21.399 certain parts of the market, At what point does this 0:18:21.480 --> 0:18:24.080 become a larger issue, even a tax payer issue. 0:18:25.040 --> 0:18:27.119 Oh, I mean, well, you can see in some in 0:18:27.200 --> 0:18:29.560 some cases it already is. I mean, you guys were 0:18:29.600 --> 0:18:32.040 just talking about interest in the cost of interest in 0:18:32.080 --> 0:18:35.040 the last segment. You know, that's that's what it's going 0:18:35.080 --> 0:18:37.280 to look like to the taxpayer, is that, you know, 0:18:37.359 --> 0:18:40.439 the auctions are just going to get more expensive because 0:18:40.440 --> 0:18:42.400 it's just going to get harder and harder for these 0:18:42.400 --> 0:18:46.240 dealers to continue taking down this supply. And what's interesting 0:18:46.359 --> 0:18:49.560 is remember not the dealer balance sheets are not created equals, 0:18:49.560 --> 0:18:52.760 so you know, dealers have the autonomy to decide where 0:18:52.800 --> 0:18:56.320 their priorities are. And you know, during the treasury refunding 0:18:56.480 --> 0:18:58.639 one year, I think it was last May, you know, 0:18:58.680 --> 0:19:00.880 they were doing something called loose and they were just 0:19:01.119 --> 0:19:03.760 kind of kicking around ideas and what they could do 0:19:03.840 --> 0:19:06.320 to help improve treasury market function, and one of the 0:19:06.359 --> 0:19:09.080 things they proposed is almost doing a table to see 0:19:09.080 --> 0:19:12.040 who the biggest dealers were in the treasury auctions as 0:19:12.080 --> 0:19:13.879 a way to sort of light a fire under the 0:19:13.920 --> 0:19:16.120 rest of the dealer community to say, hey, if you're 0:19:16.119 --> 0:19:18.040 not doing your part and you're not pulling your weight, 0:19:18.400 --> 0:19:21.399 you have to because there's just too much supply to 0:19:21.480 --> 0:19:24.119 leave it to a handful of dealers to be taken down. 0:19:24.240 --> 0:19:26.280 There's only twenty four of them. We're down from the 0:19:26.280 --> 0:19:28.000 peak that we saw in terms of the number of 0:19:28.000 --> 0:19:30.240 dealers that we saw in nineteen eighty eight. So this 0:19:30.400 --> 0:19:33.479 is so critical that everybody is playing their partner here, 0:19:33.520 --> 0:19:36.119 and if they're not, there are serious consequences in the 0:19:36.200 --> 0:19:39.359 terms of costs the economy. It's the taxpayer and to 0:19:39.440 --> 0:19:43.040 those just trying to finance their transactions in the financial system. 0:19:43.800 --> 0:19:47.080 Alex it's a great story. I recommend everybody check it out. 0:19:47.080 --> 0:19:52.040 Treasuries fifty trillion dollar dayl usual test strained dealer pipes 0:19:52.480 --> 0:19:56.720 and I think that was one of the coolest quotes 0:19:56.800 --> 0:19:59.200 in the story, Casey Spizzano saying, you're trying to put 0:19:59.200 --> 0:20:02.320 more treasuries the same pipes, but those pipes aren't getting 0:20:02.600 --> 0:20:03.240 any bigger. 0:20:03.600 --> 0:20:05.760 It's a it's a pretty great way to paint the picture. 0:20:06.160 --> 0:20:10.280 Als Harris there with the story on primary dealers, it's 0:20:10.280 --> 0:20:10.920 our big take. 0:20:11.000 --> 0:20:13.320 Check it out when Wall Street being a primary dealer 0:20:13.520 --> 0:20:16.240 was a really good business, the bombable business. 0:20:16.480 --> 0:20:16.720 Yeah. 0:20:16.760 --> 0:20:18.000 I mean when I came on the street in the 0:20:18.000 --> 0:20:20.720 trading desk, the government bomb desk was the bomb. 0:20:20.800 --> 0:20:23.919 They had so much capital, they could swing it around. 0:20:24.160 --> 0:20:24.720 They dealt with. 0:20:24.760 --> 0:20:26.640 The They could do a whole show on things that 0:20:26.800 --> 0:20:29.240 have changed since yes started on Wall Street. 0:20:29.880 --> 0:20:31.879 The City l Securities really wanted to be in it. 0:20:32.000 --> 0:20:33.600 They kind of just shelved the plan. That was a 0:20:33.680 --> 0:20:34.120 huge story. 0:20:34.160 --> 0:20:34.760 This isn't there. 0:20:36.200 --> 0:20:40.080 You're listening to the Bloomberg Intelligence Podcast. Catch us live 0:20:40.160 --> 0:20:42.879 weekdays at ten am Eastern on Apple, card Playing and 0:20:43.000 --> 0:20:45.879 broyd Outo with the Bloomberg Business app. Listen on demand 0:20:45.920 --> 0:20:50.000