1 00:00:10,880 --> 00:00:14,440 Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast. 2 00:00:14,560 --> 00:00:20,400 Speaker 1: I'm Tracy Alloway and I'm Joe. So Joe, it's uh, well, 3 00:00:20,520 --> 00:00:23,600 Speaker 1: there's been a bit of drama in the treasury market 4 00:00:23,720 --> 00:00:27,200 Speaker 1: once again. Yeah, I noticed. Um, you got to do 5 00:00:27,280 --> 00:00:30,720 Speaker 1: one of your Tracy Elloway signature things where you talk 6 00:00:30,800 --> 00:00:33,240 Speaker 1: about a move that happened that's always supposed to happen 7 00:00:33,280 --> 00:00:36,360 Speaker 1: like once every three billion years. Yes. Um. I love 8 00:00:36,440 --> 00:00:39,040 Speaker 1: talking about those because it really gives everyone the opportunity 9 00:00:39,120 --> 00:00:42,000 Speaker 1: to show that they've read to Leb's books by saying 10 00:00:42,040 --> 00:00:45,519 Speaker 1: that the world isn't normally distributed. But of course we 11 00:00:45,600 --> 00:00:48,520 Speaker 1: did see some pretty big moves in the treasury market. 12 00:00:48,560 --> 00:00:52,599 Speaker 1: So first of all, the ten year yield jumped up 13 00:00:52,640 --> 00:00:55,480 Speaker 1: to one point six percent. This was in the last 14 00:00:55,520 --> 00:00:59,440 Speaker 1: week of February. But the really big move came in 15 00:00:59,520 --> 00:01:02,200 Speaker 1: the five five year and I think that one had 16 00:01:02,320 --> 00:01:06,800 Speaker 1: something like a seven or eight standard deviation move, you know, 17 00:01:06,840 --> 00:01:08,880 Speaker 1: one of those things that's only supposed to happen in 18 00:01:09,040 --> 00:01:13,280 Speaker 1: like ten billion years kind of things. And really, I 19 00:01:13,319 --> 00:01:16,600 Speaker 1: know people make fun of standard deviations and sigma events, 20 00:01:16,640 --> 00:01:20,160 Speaker 1: but really we're talking about the world's most liquid market 21 00:01:21,000 --> 00:01:24,360 Speaker 1: and stuff like this keeps happening. This is I think 22 00:01:24,600 --> 00:01:29,360 Speaker 1: the fourth big about of treasury market chaos that we've 23 00:01:29,360 --> 00:01:31,679 Speaker 1: had in just a couple of years. So I'm thinking back. 24 00:01:32,200 --> 00:01:35,800 Speaker 1: We had one in um what was it September? We 25 00:01:35,880 --> 00:01:39,520 Speaker 1: had Rebo madness, Then we had the March chaos in 26 00:01:40,400 --> 00:01:42,640 Speaker 1: with the levered U S. T trades blowing up, and 27 00:01:42,680 --> 00:01:47,120 Speaker 1: then we had a mini rates blowout in October, and 28 00:01:47,240 --> 00:01:50,960 Speaker 1: now we just had the most recent incidents. So something 29 00:01:51,400 --> 00:01:54,840 Speaker 1: is going on, and clearly there is a persistent issue 30 00:01:54,920 --> 00:01:57,520 Speaker 1: in the U S. Treasury market. Yeah, there's a lot 31 00:01:57,560 --> 00:02:00,440 Speaker 1: of things going on at once these day is because 32 00:02:00,480 --> 00:02:05,280 Speaker 1: there seems to be ongoing structural issues, questions about liquidity, 33 00:02:05,320 --> 00:02:07,960 Speaker 1: which is weird in a the world's most deep and 34 00:02:08,000 --> 00:02:11,720 Speaker 1: liquid market, and be a market in which the FED 35 00:02:11,840 --> 00:02:14,799 Speaker 1: is actively supplying a lot of liquidity, are very active 36 00:02:14,840 --> 00:02:18,840 Speaker 1: in the market. And then of course it's interacting with 37 00:02:18,919 --> 00:02:22,120 Speaker 1: the economic situation and the policy situation, because we have 38 00:02:22,200 --> 00:02:24,839 Speaker 1: this FED that said we're not going to raise rates 39 00:02:24,919 --> 00:02:28,120 Speaker 1: until the economy hits these benchmarks, and everyone's washing to 40 00:02:28,120 --> 00:02:30,560 Speaker 1: see the FEDS credibility. We also have a very out 41 00:02:30,639 --> 00:02:34,440 Speaker 1: rapidly improving economy. We have people warning about inflation for 42 00:02:34,440 --> 00:02:37,320 Speaker 1: the first time, So all kinds of things happening at once. 43 00:02:37,560 --> 00:02:40,880 Speaker 1: But yes, to your point, the big action we've seen. 44 00:02:40,919 --> 00:02:43,280 Speaker 1: We've seen rates at the long end, ten year, thirty 45 00:02:43,320 --> 00:02:45,240 Speaker 1: year yields have been rising for a while since the 46 00:02:45,240 --> 00:02:48,080 Speaker 1: middle of last year, but it's really the action at 47 00:02:48,120 --> 00:02:51,160 Speaker 1: the shorter end that's striking here. Yeah. And of course, 48 00:02:51,200 --> 00:02:53,200 Speaker 1: one of the weird things about last week is you 49 00:02:53,240 --> 00:02:56,520 Speaker 1: mentioned the economy, but we have this big tantrum in 50 00:02:56,680 --> 00:03:01,040 Speaker 1: bond yields without a corresponding taper. I guess, so we 51 00:03:01,120 --> 00:03:04,640 Speaker 1: kind of had a taperless tantrum because not that much 52 00:03:04,880 --> 00:03:08,640 Speaker 1: changed last week. We didn't have FED speakers talking about 53 00:03:08,720 --> 00:03:11,040 Speaker 1: rates rising or anything like that, but we have this 54 00:03:11,160 --> 00:03:14,440 Speaker 1: huge move in the bond market. So a lot of 55 00:03:14,440 --> 00:03:17,240 Speaker 1: focus on microstructure at the moment, a lot of focus 56 00:03:17,360 --> 00:03:21,679 Speaker 1: on liquidity, ease of trading, and the overall organization of 57 00:03:21,720 --> 00:03:25,360 Speaker 1: the treasury market. And we have the perfect person to 58 00:03:25,440 --> 00:03:29,040 Speaker 1: talk about all those things. We're gonna be speaking with 59 00:03:29,240 --> 00:03:33,200 Speaker 1: Sultan Posar from Credits with I can't wait, Let's do it. Yeah. 60 00:03:33,800 --> 00:03:36,520 Speaker 1: Um so, Sultan, I should say, in addition to being 61 00:03:36,800 --> 00:03:39,720 Speaker 1: a strategist over Credits, has also been on the All 62 00:03:39,720 --> 00:03:43,840 Speaker 1: Thoughts podcast multiple times, so we will be getting you 63 00:03:44,200 --> 00:03:47,000 Speaker 1: that tote bag any day now, Sultan, thank you so 64 00:03:47,080 --> 00:03:49,640 Speaker 1: much for coming on again. Thank you very much for 65 00:03:49,640 --> 00:03:51,880 Speaker 1: having me. I should just say one more thing, which 66 00:03:51,920 --> 00:03:55,040 Speaker 1: is that every time there's any volatility in the rates market, 67 00:03:55,560 --> 00:03:58,120 Speaker 1: someone I bas me it says, you guys got to 68 00:03:58,160 --> 00:04:01,600 Speaker 1: get result on again. It happens every time anything takes 69 00:04:01,680 --> 00:04:04,920 Speaker 1: higher on some screen of like overnight funding rates to 70 00:04:04,960 --> 00:04:06,880 Speaker 1: whatever they're like, when do you have exulting back on 71 00:04:06,920 --> 00:04:10,360 Speaker 1: the episode? So this is a lot of requests for 72 00:04:10,400 --> 00:04:14,560 Speaker 1: this one. Sorry, go on. Okay, Well, on that note, 73 00:04:14,600 --> 00:04:16,600 Speaker 1: I mean, why don't we start out with a big questions? 74 00:04:16,720 --> 00:04:20,240 Speaker 1: So every time there's some sort of chaos in the 75 00:04:20,320 --> 00:04:22,719 Speaker 1: rates market, Joe gets an I be asking for you 76 00:04:22,760 --> 00:04:24,920 Speaker 1: to come on the show. There's been a lot of 77 00:04:24,920 --> 00:04:27,240 Speaker 1: those over the past couple of years, and as we 78 00:04:27,240 --> 00:04:31,479 Speaker 1: were discussing, that's something you wouldn't necessarily expect for the 79 00:04:31,520 --> 00:04:35,360 Speaker 1: world's most liquid market. So what's going on here and 80 00:04:35,480 --> 00:04:38,920 Speaker 1: why do we keep getting these sort of many blow 81 00:04:39,040 --> 00:04:42,480 Speaker 1: ups in rates? I think people get shaken out of 82 00:04:42,520 --> 00:04:46,839 Speaker 1: their positions all the time. I mean, just through just 83 00:04:46,960 --> 00:04:49,599 Speaker 1: to me, who set the set the stage for the conversation. 84 00:04:50,000 --> 00:04:52,200 Speaker 1: I think there's there's a number of things that are happening, 85 00:04:52,440 --> 00:04:55,200 Speaker 1: um that has happened last week, for a number of 86 00:04:55,240 --> 00:04:59,599 Speaker 1: weeks now and really since the Democratic win and the 87 00:04:59,640 --> 00:05:02,480 Speaker 1: Blues the you know, the treasury curve has been steepening 88 00:05:02,800 --> 00:05:06,200 Speaker 1: quite remarkably, I mean relative to uh the slope of 89 00:05:06,240 --> 00:05:10,039 Speaker 1: curves in Germany, in France and Japan. You know, the 90 00:05:10,080 --> 00:05:12,560 Speaker 1: U s treasury curve has gotten quite steep for a 91 00:05:12,640 --> 00:05:16,120 Speaker 1: number of reasons. You had, you had the Blue sweep. 92 00:05:16,360 --> 00:05:19,840 Speaker 1: You have the vaccine rollout, which is you know, happening 93 00:05:20,160 --> 00:05:23,599 Speaker 1: in the US more rapidly perhaps than in other parts 94 00:05:23,640 --> 00:05:26,880 Speaker 1: of the world. You have the market starting to price 95 00:05:26,920 --> 00:05:32,000 Speaker 1: in recovery, the market trying to price in the inflation outlooks, 96 00:05:32,440 --> 00:05:35,599 Speaker 1: and the market is you know, getting excited about the 97 00:05:35,640 --> 00:05:38,599 Speaker 1: idea that with inflation, bill surely comes from that action, 98 00:05:38,640 --> 00:05:40,599 Speaker 1: and that is going to you know, try to chase 99 00:05:40,680 --> 00:05:43,080 Speaker 1: down inflation and keep it in check. And so all 100 00:05:43,120 --> 00:05:46,640 Speaker 1: of these things I think have driven the steepening of 101 00:05:46,680 --> 00:05:49,000 Speaker 1: the curve. But you know, the interesting thing is that 102 00:05:49,040 --> 00:05:52,920 Speaker 1: the steepening of the curve has been fairly orderly, okay, 103 00:05:52,920 --> 00:05:56,360 Speaker 1: And so what happened last week was a little bit 104 00:05:56,400 --> 00:06:00,599 Speaker 1: plumbing related, but again the the the underlying structural driver 105 00:06:00,720 --> 00:06:04,760 Speaker 1: of rising yields has been more fundamentally driven. What happened 106 00:06:04,839 --> 00:06:07,280 Speaker 1: last week, I would say that there were two central 107 00:06:07,279 --> 00:06:11,039 Speaker 1: banks that were quite a bit in the headlines um 108 00:06:11,400 --> 00:06:13,880 Speaker 1: last week and and that got the markets a little 109 00:06:13,920 --> 00:06:17,120 Speaker 1: bit kittery. I think there were some headlines around, uh, 110 00:06:17,160 --> 00:06:19,480 Speaker 1: the r B n Z, and there were some headlines 111 00:06:19,520 --> 00:06:21,280 Speaker 1: around the r B A, you know, with the r 112 00:06:21,360 --> 00:06:24,599 Speaker 1: B and Z. I think what what didn't help the 113 00:06:24,640 --> 00:06:30,080 Speaker 1: situation was the market interpreted the headline that the Finance 114 00:06:30,120 --> 00:06:34,799 Speaker 1: Minister of New Zealand has forced a new mandate on 115 00:06:34,800 --> 00:06:37,760 Speaker 1: on on the Reserve Bank of New Zealand because you know, 116 00:06:37,800 --> 00:06:41,000 Speaker 1: house price targetting and house prices have been through the 117 00:06:41,080 --> 00:06:43,440 Speaker 1: roof in New Zealand and so hikes are coming because 118 00:06:43,480 --> 00:06:45,719 Speaker 1: of that, which is which is absolutely not the case. 119 00:06:45,760 --> 00:06:48,160 Speaker 1: I mean, you know, the RBNZ is policy mandate is 120 00:06:48,160 --> 00:06:50,800 Speaker 1: pretty much unchanged. I mean, they have their price stability mandate, 121 00:06:50,839 --> 00:06:54,280 Speaker 1: they have their U full employment man, they have their 122 00:06:54,760 --> 00:06:57,840 Speaker 1: financial stability mandate. And all that has happened is that 123 00:06:57,839 --> 00:07:01,520 Speaker 1: that financial stability mandate getting more explicit peace to it, 124 00:07:01,640 --> 00:07:05,440 Speaker 1: which is, you know, looking at house prices more carefully, 125 00:07:05,680 --> 00:07:09,600 Speaker 1: um in the future, particularly house price dynamics driven by 126 00:07:10,080 --> 00:07:14,360 Speaker 1: second home buyers and investment property buyers. That was number one. 127 00:07:14,440 --> 00:07:18,440 Speaker 1: Number two UM, the r v A had breached a 128 00:07:18,440 --> 00:07:21,520 Speaker 1: youth curve target, okay, and so the market was looking 129 00:07:21,720 --> 00:07:25,320 Speaker 1: very closely at the three year point in the in 130 00:07:25,360 --> 00:07:28,400 Speaker 1: the Australian government bond market and it got you know, 131 00:07:28,520 --> 00:07:31,600 Speaker 1: one basis points to basis point three basis points higher 132 00:07:32,440 --> 00:07:35,040 Speaker 1: than the yield curve target. And the RBA didn't truly 133 00:07:35,120 --> 00:07:39,040 Speaker 1: do anything. And so because the RBA was so slow 134 00:07:39,120 --> 00:07:42,320 Speaker 1: to respond to to to the breach of that youth 135 00:07:42,320 --> 00:07:45,720 Speaker 1: curve target, UM, I think the market got quite spooked 136 00:07:45,800 --> 00:07:49,160 Speaker 1: by that. You know, Australian accounts did try to get 137 00:07:49,320 --> 00:07:52,680 Speaker 1: long Australian bonds, but you know, things were moving so 138 00:07:52,760 --> 00:07:55,840 Speaker 1: fast and prices were getting so much that they got 139 00:07:55,880 --> 00:07:58,480 Speaker 1: you know, limited down very quickly. So if you couldn't 140 00:07:58,480 --> 00:08:01,320 Speaker 1: take advantage of the sellout in the US really and yields, 141 00:08:01,880 --> 00:08:04,320 Speaker 1: what a lot of account in Austrailia have done is 142 00:08:04,400 --> 00:08:08,200 Speaker 1: they have rather shorted US U S treasuries. And so 143 00:08:08,240 --> 00:08:11,040 Speaker 1: now we are in a Tuesday Wednesday time frame, and 144 00:08:11,080 --> 00:08:13,200 Speaker 1: then by the time we got to Thursday in the US, 145 00:08:13,320 --> 00:08:16,320 Speaker 1: we had a scheduled seven year auction UM and that 146 00:08:16,400 --> 00:08:20,240 Speaker 1: auction went absolutely horribly. It was, you know, one of 147 00:08:20,240 --> 00:08:24,360 Speaker 1: the most undersubscribed in recent memory. I forget how far 148 00:08:24,400 --> 00:08:27,280 Speaker 1: you have to go back to find something as lowly subscribed. 149 00:08:27,960 --> 00:08:30,560 Speaker 1: And you know that also had some technical drivers do 150 00:08:30,600 --> 00:08:32,400 Speaker 1: it because you know, in the US we are in 151 00:08:32,480 --> 00:08:35,920 Speaker 1: this kind of Noman's land from a from a regulatory perspective, 152 00:08:35,960 --> 00:08:39,840 Speaker 1: where the bank portfolios that are normally have a big 153 00:08:39,880 --> 00:08:43,320 Speaker 1: presence in in these in these auctions have been a 154 00:08:43,360 --> 00:08:46,080 Speaker 1: bit on the sidelines. Laterly because there's a big question 155 00:08:46,120 --> 00:08:48,960 Speaker 1: mark in the US regarding you know, the SLR treatment 156 00:08:49,080 --> 00:08:51,679 Speaker 1: of of treasuries. You know, is it going to get 157 00:08:51,720 --> 00:08:55,480 Speaker 1: expended the exemption from the SLR or not um So, 158 00:08:55,480 --> 00:08:58,600 Speaker 1: so there was a lot of uncertainty about that. And 159 00:08:58,640 --> 00:09:01,280 Speaker 1: then you know you mentioned the five year point. I mean, 160 00:09:01,320 --> 00:09:04,280 Speaker 1: it so happens that, you know, one a popular trade 161 00:09:04,280 --> 00:09:07,120 Speaker 1: in the US has been you know, people shorting the 162 00:09:07,120 --> 00:09:09,920 Speaker 1: five year and being short the five year and along 163 00:09:10,040 --> 00:09:12,720 Speaker 1: the thirty year, and you know, as all these rates 164 00:09:12,760 --> 00:09:15,840 Speaker 1: market dynamics were happening and the market was, you know, 165 00:09:15,960 --> 00:09:20,679 Speaker 1: questioning central banks commitments to low rates for a long time. 166 00:09:20,840 --> 00:09:22,600 Speaker 1: I think you know, people were just shaking out of 167 00:09:22,640 --> 00:09:25,280 Speaker 1: these carry positions. And you know, we have a financial 168 00:09:25,320 --> 00:09:30,120 Speaker 1: system that is highly levered because race are solo, right, 169 00:09:30,160 --> 00:09:33,679 Speaker 1: so one way of generating a decent amount of return 170 00:09:34,200 --> 00:09:37,120 Speaker 1: with low risk, low yielding assets as you lever it up, 171 00:09:37,200 --> 00:09:39,240 Speaker 1: and every time you have a change in expectations and 172 00:09:39,240 --> 00:09:41,840 Speaker 1: your understanding of the world and for how long the 173 00:09:41,880 --> 00:09:45,240 Speaker 1: central banks are being to stay accommodative, you get shaken 174 00:09:45,240 --> 00:09:50,000 Speaker 1: out of these positions and and things are quite volatible 175 00:09:50,040 --> 00:09:54,200 Speaker 1: when it happens. So there's obviously quite a bit going 176 00:09:54,200 --> 00:09:56,320 Speaker 1: on here, and I the way you laid it out 177 00:09:56,360 --> 00:09:58,080 Speaker 1: is really great. And of course it seems like a 178 00:09:58,120 --> 00:10:01,640 Speaker 1: classic finance thing that even though there's a lot of 179 00:10:01,640 --> 00:10:05,280 Speaker 1: different things, somehow it randomly gets kicked off by policy 180 00:10:05,440 --> 00:10:08,000 Speaker 1: choices at the Reserve Bank of New Zealand or the 181 00:10:08,000 --> 00:10:10,920 Speaker 1: Reserve Bank of Australia and then it spills into their 182 00:10:11,600 --> 00:10:14,800 Speaker 1: You mentioned the SLR and the questions about that, and 183 00:10:14,840 --> 00:10:16,760 Speaker 1: in fact, some of the I V s that I 184 00:10:16,800 --> 00:10:18,280 Speaker 1: get when they're like when they want to hear you 185 00:10:18,320 --> 00:10:22,400 Speaker 1: on it's specifically about that what is it. I'm aware 186 00:10:22,480 --> 00:10:24,920 Speaker 1: that something, some decision has to be made at the 187 00:10:25,040 --> 00:10:27,400 Speaker 1: end of this month. It's going to affect bank liquidity, 188 00:10:27,440 --> 00:10:31,079 Speaker 1: but sort of describe what this sort of this ambiguity 189 00:10:31,160 --> 00:10:33,160 Speaker 1: that's hanging over the market is and how that is 190 00:10:33,160 --> 00:10:38,000 Speaker 1: affecting UM rates, market liquidity. So this is a big topic. 191 00:10:38,040 --> 00:10:40,760 Speaker 1: I'm you know, trying to think through how to attack 192 00:10:40,840 --> 00:10:44,320 Speaker 1: the question. Okay, one, you know, you know there's lots 193 00:10:44,320 --> 00:10:47,040 Speaker 1: of ambiguities, right, So you know, first of all, we 194 00:10:47,080 --> 00:10:51,120 Speaker 1: have an exemption currently in place which says that you know, 195 00:10:51,200 --> 00:10:55,760 Speaker 1: reserves just cast of central banks and treasuries that are 196 00:10:55,760 --> 00:11:01,840 Speaker 1: bank holds are exempt from calculating the the supplementary leverage ratio. 197 00:11:02,800 --> 00:11:05,679 Speaker 1: So this these leverage ratios are much higher because of 198 00:11:05,720 --> 00:11:09,600 Speaker 1: that now, and that exemption UM was put in place 199 00:11:09,640 --> 00:11:13,360 Speaker 1: in April one last year, and it's set to expire 200 00:11:13,679 --> 00:11:18,080 Speaker 1: at the end of this month, March thirty one, and 201 00:11:18,280 --> 00:11:21,280 Speaker 1: so no one knows whether it's going to get extended, 202 00:11:21,880 --> 00:11:26,439 Speaker 1: whether it's going to be renewed temporarily or or if 203 00:11:26,440 --> 00:11:29,360 Speaker 1: it's going to whether it's going to get extended permanently, 204 00:11:29,400 --> 00:11:31,960 Speaker 1: whether it's going to get taken away. You know, a 205 00:11:32,040 --> 00:11:36,640 Speaker 1: letter from Senator Brown and Senator Warrenberg in the headlines today, Um, 206 00:11:36,720 --> 00:11:38,600 Speaker 1: you know they've sent them a letter to to the 207 00:11:38,640 --> 00:11:44,000 Speaker 1: Federal Reserve arguing against making this exemption permanent. There are 208 00:11:44,080 --> 00:11:48,480 Speaker 1: ideas that have been put forth by the Professor Daryl 209 00:11:48,800 --> 00:11:52,800 Speaker 1: DARYLD Duffy at Stanford that you know, maybe only reserves 210 00:11:52,840 --> 00:11:57,960 Speaker 1: should be exempted permanently, but not treasuries. That would be 211 00:11:58,000 --> 00:12:00,880 Speaker 1: more in line with the global stand undered where you know, 212 00:12:00,920 --> 00:12:04,880 Speaker 1: the ECB has exempted reserves, the SMB has exempted reserves, 213 00:12:05,040 --> 00:12:07,000 Speaker 1: but that exemption by the way ended at the end 214 00:12:07,000 --> 00:12:11,920 Speaker 1: of December. Already in the Bank of England exempts reserves, 215 00:12:11,920 --> 00:12:15,080 Speaker 1: so that would be more in line with the international standard. 216 00:12:15,200 --> 00:12:17,280 Speaker 1: But you know, the downside of that would be that 217 00:12:17,360 --> 00:12:20,800 Speaker 1: you know, the banks would be forced to sell treasuries 218 00:12:20,840 --> 00:12:23,640 Speaker 1: because you know, if your balance is constrained, um, and 219 00:12:23,720 --> 00:12:26,920 Speaker 1: only reserves are exempt from the SLR, and you bought 220 00:12:26,960 --> 00:12:29,200 Speaker 1: a lot of treasuries last year, then you will have 221 00:12:29,280 --> 00:12:32,160 Speaker 1: to sell all those treasuries. So that's that's what this 222 00:12:32,160 --> 00:12:35,160 Speaker 1: this uh, this uncertainty is. You know, when it comes 223 00:12:35,240 --> 00:12:38,960 Speaker 1: to the SLR, really there's really two things that you 224 00:12:39,160 --> 00:12:42,040 Speaker 1: want to think about the first is that we are 225 00:12:42,120 --> 00:12:44,680 Speaker 1: not done with que and we are not done with 226 00:12:45,400 --> 00:12:47,800 Speaker 1: you know, the wall of cash hitting the banking system. Right, 227 00:12:47,840 --> 00:12:50,920 Speaker 1: So there's two things on the horizon that we are 228 00:12:50,960 --> 00:12:55,160 Speaker 1: focused on. Number One, treasuries cash balances are coming down. 229 00:12:55,400 --> 00:12:58,280 Speaker 1: I mean, you know, that's one point six trillion dollars 230 00:12:58,280 --> 00:13:01,120 Speaker 1: of cash sitting in a in a in a bank 231 00:13:01,120 --> 00:13:03,840 Speaker 1: account that at the at the Federal Reserve. And and 232 00:13:03,880 --> 00:13:06,640 Speaker 1: as those balances come down, reserves in the banking system 233 00:13:06,640 --> 00:13:09,880 Speaker 1: are going to go up. And number two, QUEE is ongoing, 234 00:13:10,000 --> 00:13:12,000 Speaker 1: and it's a hundred and spenty billion dollars a month. 235 00:13:12,640 --> 00:13:15,559 Speaker 1: So you know, at face value, if all the Treasuries 236 00:13:15,600 --> 00:13:18,640 Speaker 1: cash banances come down to zero, and if QUI proceeds 237 00:13:18,679 --> 00:13:20,880 Speaker 1: this year, we are going to be adding two to 238 00:13:20,960 --> 00:13:25,960 Speaker 1: three trillion dollars of cash into the banking system. And 239 00:13:26,000 --> 00:13:29,600 Speaker 1: so the banking system does not have the balance sheets 240 00:13:29,679 --> 00:13:35,360 Speaker 1: to take on two three trillion dollars of cash without 241 00:13:35,559 --> 00:13:38,760 Speaker 1: SLR relief, you know, so the thinking goes. And then 242 00:13:38,800 --> 00:13:42,079 Speaker 1: the other problem is that you know, the ban on 243 00:13:42,160 --> 00:13:45,600 Speaker 1: stock buy backs ended, and the banks are you know, 244 00:13:45,640 --> 00:13:49,280 Speaker 1: getting ready to return capital to shareholders and and and 245 00:13:49,800 --> 00:13:52,680 Speaker 1: if you. If you buy back stock and this SLR 246 00:13:52,760 --> 00:13:56,560 Speaker 1: exemption does not happen, then you basically are in a 247 00:13:56,600 --> 00:14:00,079 Speaker 1: position where the banking system is going to return and 248 00:14:00,200 --> 00:14:03,960 Speaker 1: capital to shareholders that would otherwise have been used to 249 00:14:04,080 --> 00:14:07,960 Speaker 1: take on more reserves and and and and treasuries in 250 00:14:08,000 --> 00:14:10,280 Speaker 1: the in the system. So when we talk about this 251 00:14:10,400 --> 00:14:12,920 Speaker 1: SELLR exemption, we kind of think about it as this 252 00:14:13,040 --> 00:14:16,800 Speaker 1: magic bullet that's going to allow the banking system to 253 00:14:16,840 --> 00:14:19,960 Speaker 1: take on two or three trillion dollars of reserves. So 254 00:14:20,800 --> 00:14:24,120 Speaker 1: let's assume that the seller exemption happen. You know, this 255 00:14:24,200 --> 00:14:27,160 Speaker 1: stellar exemption really matters for the for the handful of 256 00:14:27,200 --> 00:14:29,760 Speaker 1: big banks that that really are key for for U 257 00:14:29,880 --> 00:14:33,480 Speaker 1: S fiancial system. And these banks are JP Morgan, whilst 258 00:14:33,480 --> 00:14:36,840 Speaker 1: Fargo City Bank, Bank of America I would perhaps put 259 00:14:36,920 --> 00:14:38,800 Speaker 1: you know, P and C in the bucket as well. 260 00:14:38,880 --> 00:14:40,960 Speaker 1: So these are these are the banks that are the 261 00:14:41,000 --> 00:14:45,680 Speaker 1: big repositories of deposits and reserves and treasury securities, and 262 00:14:45,680 --> 00:14:48,560 Speaker 1: they are the banks that have been underwriting the fiscal 263 00:14:48,600 --> 00:14:52,320 Speaker 1: and monetary extension all of all of last year. So 264 00:14:52,320 --> 00:14:54,880 Speaker 1: so let's assume that we do this SLR exemption. So 265 00:14:54,920 --> 00:14:57,680 Speaker 1: what would happen. Would you know a bank like JP 266 00:14:57,800 --> 00:15:01,080 Speaker 1: Morgan be in pole position to put on another five 267 00:15:01,160 --> 00:15:04,000 Speaker 1: hundred billion dollars of reserves at the FED and another 268 00:15:04,000 --> 00:15:07,440 Speaker 1: five billion dollars of deposits as the stimulus checks go out. 269 00:15:07,840 --> 00:15:11,960 Speaker 1: The answer is no, because you know, JP Morgan has 270 00:15:12,120 --> 00:15:15,560 Speaker 1: two constraints. It has an SLR constraint and it has 271 00:15:15,600 --> 00:15:18,920 Speaker 1: a g SIP constraint. So even if you exempt reserves 272 00:15:18,920 --> 00:15:21,600 Speaker 1: and treasuries from the SLR, you know that bank is 273 00:15:21,600 --> 00:15:23,360 Speaker 1: still not going to be in a position to take 274 00:15:23,400 --> 00:15:27,840 Speaker 1: on massive amounts of new deposits and additional reserves and 275 00:15:27,880 --> 00:15:31,920 Speaker 1: additional treasury securities because that would push their GCIP score 276 00:15:32,360 --> 00:15:35,280 Speaker 1: and their GIPS surcharged from four percent to four and 277 00:15:35,280 --> 00:15:38,520 Speaker 1: a half percent. You know, and their management has repeated 278 00:15:39,000 --> 00:15:40,840 Speaker 1: a number of times that they don't want to have 279 00:15:40,880 --> 00:15:43,040 Speaker 1: a higher g SUP score and they don't want to 280 00:15:43,120 --> 00:15:46,000 Speaker 1: higher capital ratio than's about an a half percent. Okay, 281 00:15:46,040 --> 00:15:49,480 Speaker 1: so you know, SLR exemption or not, you know, JP 282 00:15:49,560 --> 00:15:52,960 Speaker 1: Morgan is not in a position to take on a 283 00:15:53,120 --> 00:15:56,960 Speaker 1: large amount of additional reserves. So that's number one. Number two. 284 00:15:57,400 --> 00:15:59,920 Speaker 1: You know, well far ago the bank that I have 285 00:16:00,000 --> 00:16:03,200 Speaker 1: been writing about a lot recently. Well Fargo is is 286 00:16:03,200 --> 00:16:06,040 Speaker 1: in a unique situation because they are under an asset 287 00:16:06,080 --> 00:16:09,240 Speaker 1: growth ban okay, and they have been put into that 288 00:16:09,320 --> 00:16:13,320 Speaker 1: place because of you know, past issues they have had 289 00:16:13,600 --> 00:16:16,560 Speaker 1: and a SAD has put them in in this asset 290 00:16:16,640 --> 00:16:19,120 Speaker 1: growth band position. So you know, the the analogy there 291 00:16:19,200 --> 00:16:21,960 Speaker 1: is if you if you think of the US financial 292 00:16:21,960 --> 00:16:24,640 Speaker 1: system as a seven for seven, a Boeing seven for seven, 293 00:16:24,720 --> 00:16:26,920 Speaker 1: it's really had been. It really has been flying on 294 00:16:26,960 --> 00:16:29,920 Speaker 1: three engines because the fourth engine, you know, it's just 295 00:16:30,000 --> 00:16:33,760 Speaker 1: not working at the moment. That that's well Fargo. You know, 296 00:16:33,800 --> 00:16:36,000 Speaker 1: if you have an SLR exemption, you're still not going 297 00:16:36,040 --> 00:16:38,160 Speaker 1: to help wellth Fargo because they can't grow their balance 298 00:16:38,160 --> 00:16:40,520 Speaker 1: sheet much, okay. So that's that's the second bank. The 299 00:16:40,600 --> 00:16:44,680 Speaker 1: third City Bank is you know, it's a unique creature, 300 00:16:44,800 --> 00:16:48,520 Speaker 1: right because it's half global, half US. It's mostly an 301 00:16:48,520 --> 00:16:50,880 Speaker 1: institutional bank, not a retail bank, so it doesn't have 302 00:16:50,920 --> 00:16:53,720 Speaker 1: as big a retail present as as JP Morgan or 303 00:16:53,760 --> 00:16:56,200 Speaker 1: Bank of America. So you know, all the stimulu structs 304 00:16:56,200 --> 00:16:59,240 Speaker 1: are going out and all these cashes coming into the system. 305 00:16:59,280 --> 00:17:02,280 Speaker 1: You know, they're the posit growth is you know, not 306 00:17:02,400 --> 00:17:04,600 Speaker 1: going to be uh as big as it would be 307 00:17:04,640 --> 00:17:07,600 Speaker 1: for JP Morgan and Bank of America. And you know 308 00:17:07,680 --> 00:17:10,240 Speaker 1: the other thing about cities that they have slatlined their 309 00:17:10,240 --> 00:17:14,000 Speaker 1: balance sheet since the third quarter of twenty twenties, so 310 00:17:14,040 --> 00:17:17,680 Speaker 1: they haven't really been growing their balancie that much. Then 311 00:17:17,720 --> 00:17:19,720 Speaker 1: we have Bank of America, which is a bank that 312 00:17:19,720 --> 00:17:23,400 Speaker 1: would absolutely benefit from an SLR really because they don't 313 00:17:23,400 --> 00:17:28,919 Speaker 1: have a GC issue like UM JP Morgan UM. And 314 00:17:29,000 --> 00:17:30,960 Speaker 1: you have you know, PNC Bank, which is which is 315 00:17:31,000 --> 00:17:34,760 Speaker 1: a large regional bank when you would say probably borderline 316 00:17:34,840 --> 00:17:37,679 Speaker 1: national bank because it's so big, and so you basically 317 00:17:37,760 --> 00:17:41,480 Speaker 1: have two banks that would be the primary beneficiaries of 318 00:17:41,480 --> 00:17:44,520 Speaker 1: of an SLR relief. Then you need to stop there 319 00:17:44,680 --> 00:17:49,000 Speaker 1: because every time the SET makes a decision about SLR 320 00:17:49,080 --> 00:17:52,600 Speaker 1: relief and all these changes to the Basle three architecture, 321 00:17:53,320 --> 00:17:57,680 Speaker 1: they do something called a impact study, and the aim 322 00:17:57,760 --> 00:18:02,359 Speaker 1: of this impact studies to basically um quantify you know, 323 00:18:02,480 --> 00:18:05,600 Speaker 1: what type of a quantity benefit does the system get 324 00:18:05,760 --> 00:18:08,840 Speaker 1: by doing this route change. And you know, if you 325 00:18:08,880 --> 00:18:11,960 Speaker 1: come to the conclusion that of all these large banks 326 00:18:12,000 --> 00:18:14,439 Speaker 1: that we're trying to help, we are only going to 327 00:18:14,480 --> 00:18:18,320 Speaker 1: benefit one or two, not the entire class of Jesives, 328 00:18:18,600 --> 00:18:21,240 Speaker 1: should we really do this or be getting a lot 329 00:18:21,280 --> 00:18:24,600 Speaker 1: of mileage out of out of sl release. And I 330 00:18:24,640 --> 00:18:27,679 Speaker 1: think you know the answer there is is not really 331 00:18:27,760 --> 00:18:30,120 Speaker 1: because again you are going to be looking at five 332 00:18:30,119 --> 00:18:32,480 Speaker 1: banks and really only two of them are going to 333 00:18:32,560 --> 00:18:36,160 Speaker 1: be able to absorb a lot of reserves and treasuries. 334 00:18:36,200 --> 00:18:38,400 Speaker 1: And when you look at the scale of things to come, 335 00:18:38,480 --> 00:18:40,520 Speaker 1: you know, to the three trilli and a additional liquidity, 336 00:18:40,800 --> 00:18:43,040 Speaker 1: you know, it's clear that even those two banks are 337 00:18:43,040 --> 00:18:46,080 Speaker 1: not going to be able to absorb all of that liquidity, 338 00:18:46,280 --> 00:18:49,840 Speaker 1: you know. So, so observation number one, you know, how 339 00:18:49,880 --> 00:18:53,520 Speaker 1: do you justified when when the when the universe of 340 00:18:53,680 --> 00:18:58,040 Speaker 1: banks that can benefit from this on scale, your ability 341 00:18:58,080 --> 00:19:01,639 Speaker 1: to add balance capacity to the system is is not 342 00:19:01,720 --> 00:19:04,920 Speaker 1: that big to begin this. I think that's definitely one 343 00:19:04,960 --> 00:19:07,600 Speaker 1: thing that they are going to uh they are going 344 00:19:07,640 --> 00:19:10,479 Speaker 1: to look at the second because you know, everything that 345 00:19:10,520 --> 00:19:13,960 Speaker 1: we talked about is basically about how do you absorb 346 00:19:14,240 --> 00:19:17,840 Speaker 1: the additional cash that's going to come into the system 347 00:19:17,920 --> 00:19:21,879 Speaker 1: this year. The second aspect of of it is is 348 00:19:21,920 --> 00:19:27,040 Speaker 1: this um the ALAR exemption is is very important from 349 00:19:27,080 --> 00:19:30,080 Speaker 1: the perspective of stock buybacks. Right, so a lot of 350 00:19:30,080 --> 00:19:33,359 Speaker 1: these banks will say, um, we have a lot of 351 00:19:33,400 --> 00:19:35,800 Speaker 1: excess capital, and what that means is that they have 352 00:19:35,800 --> 00:19:39,160 Speaker 1: a lot of excess capital relative to res created assets. UM. 353 00:19:39,359 --> 00:19:42,240 Speaker 1: You know, rescreated assets are basically loans and you know 354 00:19:42,280 --> 00:19:44,639 Speaker 1: the bank's credit portfolios, but loans have not really been 355 00:19:44,640 --> 00:19:48,400 Speaker 1: growing and the banks has had a stock by back 356 00:19:48,440 --> 00:19:50,840 Speaker 1: band that has been in place since the first So 357 00:19:50,920 --> 00:19:53,720 Speaker 1: basically all all net income that the banking system has 358 00:19:53,720 --> 00:19:58,280 Speaker 1: been generating for the past twelve months has been retained 359 00:19:58,560 --> 00:20:02,480 Speaker 1: UM and you know that added to banks capital base. 360 00:20:03,000 --> 00:20:05,040 Speaker 1: So uh, you know, when the banks are saying that 361 00:20:05,080 --> 00:20:07,119 Speaker 1: we have a lot of access capital, that access capital 362 00:20:07,200 --> 00:20:10,639 Speaker 1: relative to risk weated assets, but it's not access capital 363 00:20:10,720 --> 00:20:13,439 Speaker 1: relative to all the reserves and the treasuries that have 364 00:20:14,080 --> 00:20:17,159 Speaker 1: been accumulated last year. As as the fiscal and monitor 365 00:20:17,200 --> 00:20:20,720 Speaker 1: stimulus get under way, and so you know, slur exemption 366 00:20:20,760 --> 00:20:23,720 Speaker 1: there is essential for the banks to be able to 367 00:20:23,720 --> 00:20:28,320 Speaker 1: start returning some of this excess capital UM two shareholders. 368 00:20:28,359 --> 00:20:31,679 Speaker 1: But again, you know that's a capital return aspect and 369 00:20:31,760 --> 00:20:35,359 Speaker 1: not necessarily that will make it easier for the banks 370 00:20:35,359 --> 00:20:39,439 Speaker 1: to return capital shareholders, but it won't necessarily add you know, 371 00:20:39,560 --> 00:20:41,960 Speaker 1: balance the capacity to to to the system, and I 372 00:20:42,040 --> 00:20:44,320 Speaker 1: think that's why this makes it so complicated as a 373 00:20:44,359 --> 00:21:04,639 Speaker 1: decision for the FAD. So I guess to two related questions. 374 00:21:05,119 --> 00:21:10,760 Speaker 1: One during the February bond market drama, like, how much 375 00:21:10,960 --> 00:21:17,280 Speaker 1: did SLR concerns way on dealers, um in your opinion? 376 00:21:17,320 --> 00:21:19,239 Speaker 1: And I know that you like to call around a 377 00:21:19,240 --> 00:21:21,479 Speaker 1: lot of the banks and sort of pick up market 378 00:21:21,480 --> 00:21:24,520 Speaker 1: color when these things happen, So I'm just curious how 379 00:21:24,640 --> 00:21:28,679 Speaker 1: much that came up. And then secondly, what could the 380 00:21:28,760 --> 00:21:33,600 Speaker 1: FED do to sort of relieve balance sheet pressures instead 381 00:21:33,600 --> 00:21:36,480 Speaker 1: of extending the SLR if you think that it's not 382 00:21:36,520 --> 00:21:43,000 Speaker 1: necessarily the most efficient way of doing that. Okay, Well, um, 383 00:21:43,040 --> 00:21:46,280 Speaker 1: I think I think the way last week in the 384 00:21:46,280 --> 00:21:50,480 Speaker 1: treasury market and and and the SLR question are related. 385 00:21:51,000 --> 00:21:54,120 Speaker 1: It's actually not through not through the dealer balance it's 386 00:21:54,119 --> 00:21:57,080 Speaker 1: it's basically the bank portfolios that you want to think about, right, So, 387 00:21:57,720 --> 00:22:00,359 Speaker 1: every every large US bank is going to have a 388 00:22:00,359 --> 00:22:04,280 Speaker 1: dealer subsidiary and what's called the bank operating subsidiary, and 389 00:22:04,320 --> 00:22:06,560 Speaker 1: it's the banks that have all the reserves and all 390 00:22:06,600 --> 00:22:09,239 Speaker 1: the treasuries. The dealers have obviously a treating book that 391 00:22:09,320 --> 00:22:11,439 Speaker 1: but that in a grand scheme of things that that's tiny. 392 00:22:11,520 --> 00:22:15,439 Speaker 1: So when you look at an auction that goes bad, okay, 393 00:22:15,480 --> 00:22:18,680 Speaker 1: a large part for that that auction is basically because 394 00:22:18,680 --> 00:22:21,680 Speaker 1: the bank portfolio doesn't show up, because the bank portfolio 395 00:22:21,760 --> 00:22:24,160 Speaker 1: doesn't know what's going to happen to this SLUR exemption. 396 00:22:24,640 --> 00:22:27,800 Speaker 1: You know, management is getting the balance is ready for 397 00:22:28,400 --> 00:22:30,560 Speaker 1: stock by backs. If you want to buy that stock 398 00:22:31,280 --> 00:22:34,760 Speaker 1: you basically and an SLR exemption does not happen, then 399 00:22:35,520 --> 00:22:39,440 Speaker 1: you will be you know, throwing balance with capacity away 400 00:22:39,600 --> 00:22:43,240 Speaker 1: to basically carry liquid assets. And if you do that, 401 00:22:43,280 --> 00:22:45,639 Speaker 1: you know, it's much better to do that when you 402 00:22:45,720 --> 00:22:49,040 Speaker 1: have less treasuries and more reserves. So you know, the 403 00:22:49,040 --> 00:22:52,040 Speaker 1: the the the SAR exemption angle here is just basically, 404 00:22:52,720 --> 00:22:56,600 Speaker 1: you know, had this a stellar exemption being resolved already 405 00:22:56,640 --> 00:22:59,320 Speaker 1: and and if we have clarity on it, and you 406 00:22:59,359 --> 00:23:03,520 Speaker 1: know maybe if had you know, extended permanently, you know, 407 00:23:03,560 --> 00:23:06,119 Speaker 1: then the banks would have been I guess more present 408 00:23:06,160 --> 00:23:08,879 Speaker 1: at the auction and so things would not have gone 409 00:23:09,560 --> 00:23:12,480 Speaker 1: um that that you know what happens with with again, 410 00:23:12,520 --> 00:23:14,880 Speaker 1: you know, the these these carry traders getting shaken out 411 00:23:14,880 --> 00:23:16,840 Speaker 1: of their positions. You know, the dealers are going to 412 00:23:16,920 --> 00:23:20,359 Speaker 1: kind of intermediate these things. But you know, in real time, 413 00:23:20,560 --> 00:23:23,440 Speaker 1: I guess you know, you always have these air pockets 414 00:23:23,480 --> 00:23:25,760 Speaker 1: that the dealers have to intermediate to. And when the 415 00:23:25,760 --> 00:23:27,960 Speaker 1: flows go one way and then quickly the other way, 416 00:23:28,440 --> 00:23:30,760 Speaker 1: I mean, it's never a smooth process. But I would 417 00:23:30,800 --> 00:23:35,960 Speaker 1: not say that, you know, dealers intermediation capacity was impaired 418 00:23:36,400 --> 00:23:40,080 Speaker 1: by any means, because because of these SLR deliberations, it's 419 00:23:40,119 --> 00:23:42,080 Speaker 1: more like a bank portfolio. Do I show up at 420 00:23:42,080 --> 00:23:45,159 Speaker 1: the auction and takedown of treasuries or or not? He 421 00:23:45,200 --> 00:23:47,159 Speaker 1: had a second question, trat, but I forgot, but that 422 00:23:47,280 --> 00:23:50,800 Speaker 1: was Oh. So the second question was if the SLR, 423 00:23:50,960 --> 00:23:55,400 Speaker 1: If extending the SLR exemption isn't the most efficient way 424 00:23:55,440 --> 00:23:59,119 Speaker 1: of fixing this problem, what could the FED or regulators 425 00:23:59,160 --> 00:24:01,920 Speaker 1: do instead? Again, I think, I think you have to 426 00:24:02,680 --> 00:24:06,359 Speaker 1: you have to go back to QUEI one and QUEI 427 00:24:06,680 --> 00:24:09,320 Speaker 1: Q one too. Que E three. You know that two 428 00:24:09,320 --> 00:24:14,000 Speaker 1: thousand and eight to twenty fifteen period to see how 429 00:24:14,040 --> 00:24:19,200 Speaker 1: the system absorbs liquity. Uh that's put in by central banks. 430 00:24:19,240 --> 00:24:20,919 Speaker 1: You know. The reason why I bring up Q one 431 00:24:20,960 --> 00:24:23,520 Speaker 1: to que E three is the stats balance. It expanded 432 00:24:23,560 --> 00:24:26,000 Speaker 1: back then a great deal too, but half of the 433 00:24:26,119 --> 00:24:29,560 Speaker 1: liquidity went to the large American banks and the other 434 00:24:29,680 --> 00:24:33,720 Speaker 1: half has gone to the foreign banks. What makes last 435 00:24:33,800 --> 00:24:37,439 Speaker 1: year an anomaly is that all of this liquidity that 436 00:24:37,520 --> 00:24:41,040 Speaker 1: was punned into the system went to the American banks, 437 00:24:41,080 --> 00:24:43,040 Speaker 1: and it stayed with the American banks. You know when 438 00:24:43,040 --> 00:24:46,080 Speaker 1: you look at you know, the for foreign banks holdings 439 00:24:46,080 --> 00:24:49,959 Speaker 1: of reserves at the said it's been largely flat. Okay, 440 00:24:50,000 --> 00:24:52,760 Speaker 1: So you you now basically have two case studies where 441 00:24:53,240 --> 00:24:55,840 Speaker 1: you know, we have a big downpour of liquidity, it's 442 00:24:55,840 --> 00:24:57,600 Speaker 1: all going to the American banks, and then we have 443 00:24:57,640 --> 00:25:00,919 Speaker 1: another downpour of liquity earlier in history where half of 444 00:25:00,960 --> 00:25:03,560 Speaker 1: we spent here, half aw spent there. What is going 445 00:25:03,600 --> 00:25:05,840 Speaker 1: to happen if the American banks are going to have 446 00:25:06,320 --> 00:25:10,760 Speaker 1: balanchet constraints, Well, the system is going to adjust. Um. 447 00:25:10,800 --> 00:25:13,720 Speaker 1: You know the stimulus checks that are going to come in, Uh, 448 00:25:13,760 --> 00:25:16,159 Speaker 1: those are going to be hitting people's bank deposits. You know, 449 00:25:16,240 --> 00:25:20,359 Speaker 1: these are all retail deposits that every bank loves. And 450 00:25:20,400 --> 00:25:21,960 Speaker 1: you know when the stimulus checks go out, you know 451 00:25:22,000 --> 00:25:24,000 Speaker 1: it's obviously going to be JP Morgan and Bank of 452 00:25:24,040 --> 00:25:27,200 Speaker 1: American and and all these big national banks that are 453 00:25:27,200 --> 00:25:29,400 Speaker 1: going to be getting it. But that's going to put 454 00:25:29,480 --> 00:25:32,359 Speaker 1: them in a position where if they have a fixed 455 00:25:32,400 --> 00:25:35,439 Speaker 1: quantum of balance sheets, because that's a lot really doesn't happen, 456 00:25:35,920 --> 00:25:37,440 Speaker 1: then they are going to have to take a hard 457 00:25:37,520 --> 00:25:40,720 Speaker 1: look at their deposit base and say, okay, well we 458 00:25:40,760 --> 00:25:44,520 Speaker 1: are getting good retail deposits. We have some institutional deposits 459 00:25:44,560 --> 00:25:47,720 Speaker 1: to some of it operating, some of it non operating, 460 00:25:47,840 --> 00:25:51,159 Speaker 1: non operating. It's basically access cash that these institutions just 461 00:25:51,240 --> 00:25:53,520 Speaker 1: parked with these large banks. And then you know, the 462 00:25:53,520 --> 00:25:54,960 Speaker 1: bank is going to be in a position where they 463 00:25:55,000 --> 00:25:57,600 Speaker 1: are going to have to turn some of these institutional 464 00:25:57,640 --> 00:26:01,359 Speaker 1: deposits away. There's a number of ways to to doing that. 465 00:26:01,400 --> 00:26:04,080 Speaker 1: I mean, you're basically dealing with corporate treasurers, so you 466 00:26:04,080 --> 00:26:05,560 Speaker 1: know you will pick up the phone and try to 467 00:26:05,640 --> 00:26:08,119 Speaker 1: negotiate with them. You know, I can't really hold it 468 00:26:08,160 --> 00:26:10,080 Speaker 1: in the bank, but would you mind moving it over 469 00:26:10,119 --> 00:26:12,199 Speaker 1: to my asset management arm and putting it into a 470 00:26:12,200 --> 00:26:15,080 Speaker 1: money fund or if that doesn't work, you can't put 471 00:26:15,080 --> 00:26:18,760 Speaker 1: a put a fee on you know, these deposits. Some 472 00:26:18,840 --> 00:26:21,760 Speaker 1: of the banks are doing this already. Um, I'm not 473 00:26:21,800 --> 00:26:24,560 Speaker 1: going to mention hich Bank, but one bank, for example, 474 00:26:24,920 --> 00:26:28,840 Speaker 1: in January started to charge institutions for the posit balances 475 00:26:28,920 --> 00:26:32,320 Speaker 1: that are above their December thirty starts level. And you know, 476 00:26:32,400 --> 00:26:35,000 Speaker 1: there's just applied way of saying that, Look, if you 477 00:26:35,080 --> 00:26:37,560 Speaker 1: place more cash with me, there will be a fee 478 00:26:37,600 --> 00:26:40,240 Speaker 1: associated with that. So you know, that's that's one way 479 00:26:40,240 --> 00:26:44,639 Speaker 1: of encouraging depositors to move cast from one bank to another, 480 00:26:44,840 --> 00:26:48,200 Speaker 1: or from from the banking system too to to two 481 00:26:48,200 --> 00:26:50,480 Speaker 1: money fund. And then the third thing you're gonna do 482 00:26:51,040 --> 00:26:54,520 Speaker 1: is you're going to move your deposit trade negative. And 483 00:26:54,560 --> 00:26:57,800 Speaker 1: you know this is not this is not theoretical because 484 00:26:57,800 --> 00:27:02,840 Speaker 1: if you look at um JP Morgan's fourth quarter learnings presentation, 485 00:27:02,920 --> 00:27:05,560 Speaker 1: you know they have a very interesting slide on this 486 00:27:05,800 --> 00:27:09,119 Speaker 1: that you know, we we are now approaching balance sheet constraints. 487 00:27:09,520 --> 00:27:12,480 Speaker 1: We have all these deposits coming in. The only assets 488 00:27:12,480 --> 00:27:15,199 Speaker 1: really we can deploy these deposits into is cash at 489 00:27:15,240 --> 00:27:18,399 Speaker 1: the FED which earned stand basis points. Or we can 490 00:27:18,440 --> 00:27:21,159 Speaker 1: buy treasuries, which you know, at the tenure point it 491 00:27:21,240 --> 00:27:24,240 Speaker 1: yields great, but otherwise, you know, treasuries are not not 492 00:27:24,320 --> 00:27:27,760 Speaker 1: really a good good investing opportunity. And thanks to begin that, 493 00:27:27,760 --> 00:27:30,639 Speaker 1: they're not very excited about dying treasuries and you know, 494 00:27:30,680 --> 00:27:34,160 Speaker 1: these are all very low r OV type activities UM 495 00:27:34,200 --> 00:27:36,960 Speaker 1: and low r o E means you know, you're diluting 496 00:27:37,000 --> 00:27:39,359 Speaker 1: your your bank's performance. And you know, if you have 497 00:27:39,359 --> 00:27:41,960 Speaker 1: a fifteen percent r o WE target and all the 498 00:27:42,000 --> 00:27:45,119 Speaker 1: balance sheet growth that you're getting is happening in the 499 00:27:45,760 --> 00:27:49,280 Speaker 1: in the in these low spread assets, then you basically 500 00:27:49,359 --> 00:27:51,600 Speaker 1: dial with your your banks r o WE. So you know, 501 00:27:51,600 --> 00:27:54,399 Speaker 1: the point of this this page in the learning presentation 502 00:27:54,480 --> 00:27:57,600 Speaker 1: was that for us to improve the economics of our business, 503 00:27:58,240 --> 00:28:01,040 Speaker 1: given all this downpour of liquidity and the system expansion 504 00:28:01,040 --> 00:28:03,439 Speaker 1: that the set is forcing on the banking system, we 505 00:28:03,520 --> 00:28:07,000 Speaker 1: will have to move or de consitrates negative because that's 506 00:28:07,000 --> 00:28:08,399 Speaker 1: the way that we are going to be able to 507 00:28:08,440 --> 00:28:11,600 Speaker 1: meet our our earning s targets. And so you know, 508 00:28:11,640 --> 00:28:15,520 Speaker 1: when you bring in this negative the consit traits idea 509 00:28:15,640 --> 00:28:18,919 Speaker 1: into the picture, then you know the the the picture 510 00:28:19,119 --> 00:28:22,080 Speaker 1: you know, starts to fall together because what's happening here 511 00:28:22,160 --> 00:28:24,720 Speaker 1: is that as the licutity comes in and the banking 512 00:28:24,760 --> 00:28:27,879 Speaker 1: system becomes balance sheet constrained, they are pushing the money 513 00:28:27,880 --> 00:28:31,320 Speaker 1: away into money funds and the bill market because not 514 00:28:31,400 --> 00:28:34,600 Speaker 1: everybody is going to want to invest in in money funds. 515 00:28:34,720 --> 00:28:38,200 Speaker 1: And so you know, the the idea of negative bill yields, 516 00:28:38,240 --> 00:28:41,440 Speaker 1: which is, you know, a regime where we are that 517 00:28:41,760 --> 00:28:45,120 Speaker 1: your borderline in already. You know, this regime of negative 518 00:28:45,120 --> 00:28:49,040 Speaker 1: bill yields goes hand in hand with negative deposit traits 519 00:28:49,160 --> 00:28:52,239 Speaker 1: or fees on bank deposits because you know, there's so 520 00:28:52,320 --> 00:28:54,200 Speaker 1: much cash to the banking system just doesn't want to 521 00:28:54,200 --> 00:28:56,960 Speaker 1: hold it. And you know that money is getting pushed 522 00:28:56,960 --> 00:28:58,880 Speaker 1: around in the system and we are just trying to 523 00:28:58,920 --> 00:29:02,600 Speaker 1: find home for it. And you know, I'm giving you 524 00:29:02,640 --> 00:29:04,880 Speaker 1: a very long winded answer, but basically, what are what 525 00:29:05,000 --> 00:29:07,200 Speaker 1: is the technology to basically deal with this? You know, 526 00:29:07,240 --> 00:29:10,000 Speaker 1: technology quote unquote. You know, we have a tool for this, 527 00:29:10,120 --> 00:29:13,280 Speaker 1: which is the reverse report facility. Right, all the money 528 00:29:13,520 --> 00:29:16,080 Speaker 1: that is going into the money funds, I mean, the 529 00:29:16,080 --> 00:29:19,280 Speaker 1: money funds need an asset to invest this catch into. 530 00:29:19,720 --> 00:29:23,360 Speaker 1: And so you know, really it would be as simple 531 00:29:23,400 --> 00:29:26,000 Speaker 1: as whatever the money the banking system doesn't want and 532 00:29:26,040 --> 00:29:28,000 Speaker 1: the money fund get, the money fund should be able 533 00:29:28,040 --> 00:29:30,360 Speaker 1: to place in the reverse rey pro facility one for one. 534 00:29:30,760 --> 00:29:33,440 Speaker 1: But there's one problem with this reverse rey port facility. 535 00:29:33,720 --> 00:29:37,640 Speaker 1: It's capped at thirty billion dollars per counterparty, which means 536 00:29:37,640 --> 00:29:40,000 Speaker 1: that if you're a large money fund and you have 537 00:29:40,120 --> 00:29:43,200 Speaker 1: fifty billion dollars of inflots coming at you, because you know, 538 00:29:43,480 --> 00:29:46,480 Speaker 1: Jping Morgan just pushed away fifty billion dollars of deposits, 539 00:29:46,520 --> 00:29:48,160 Speaker 1: you will only be able to put thirty billion of 540 00:29:48,240 --> 00:29:50,840 Speaker 1: that in the reverse rey pro facility, and that remaining 541 00:29:50,880 --> 00:29:55,000 Speaker 1: twenty you will be investing at rates below that, you know, 542 00:29:55,040 --> 00:29:58,520 Speaker 1: potentially at negative interest rates. You know, then the money 543 00:29:58,520 --> 00:30:01,000 Speaker 1: funds can get into a situation where if I can 544 00:30:01,040 --> 00:30:05,240 Speaker 1: invest at negative rates only my marginal inflows, I'm not 545 00:30:05,280 --> 00:30:07,280 Speaker 1: going to want that money because you know, money fund 546 00:30:07,360 --> 00:30:09,680 Speaker 1: is not supposed to break the buck, and not breaking 547 00:30:09,680 --> 00:30:13,760 Speaker 1: the buck is is possible only if yields in your 548 00:30:14,080 --> 00:30:17,760 Speaker 1: investment universe or above zero. So a number of money 549 00:30:17,760 --> 00:30:20,560 Speaker 1: funds that you talked to the especially the larger ones, 550 00:30:20,840 --> 00:30:26,560 Speaker 1: are contemplating gating inflows and basically shutting the door to 551 00:30:26,720 --> 00:30:29,680 Speaker 1: new money. And then you get into a dynamic where 552 00:30:29,680 --> 00:30:31,760 Speaker 1: the bank doesn't want to get the money, the money 553 00:30:31,800 --> 00:30:33,440 Speaker 1: fund doesn't want to get the money. So then the 554 00:30:33,480 --> 00:30:38,040 Speaker 1: bill market remains this kind of alternate shock absorber that's 555 00:30:38,040 --> 00:30:40,520 Speaker 1: going to take the inflos, and that's how you get 556 00:30:40,560 --> 00:30:44,760 Speaker 1: to negative bill yields basically between now and in the 557 00:30:44,760 --> 00:30:47,920 Speaker 1: beginning of summers. What is it that the SET can do. 558 00:30:48,000 --> 00:30:51,960 Speaker 1: The SET could simply uncap the use of this RRP facility, 559 00:30:52,440 --> 00:30:55,600 Speaker 1: and I think that would go a great length to 560 00:30:55,600 --> 00:31:00,560 Speaker 1: to ensuring that there is a flexible supply of asset 561 00:31:01,240 --> 00:31:04,800 Speaker 1: for the money fund complex where you can invest cash 562 00:31:04,920 --> 00:31:07,280 Speaker 1: at least at zero Or you know, the FED wants 563 00:31:07,280 --> 00:31:09,240 Speaker 1: to raise the the r A P rade from zero 564 00:31:09,280 --> 00:31:11,440 Speaker 1: to five basis points, then you have a marginal asset 565 00:31:11,480 --> 00:31:14,200 Speaker 1: for for the for the money fund complex that pays 566 00:31:14,280 --> 00:31:16,640 Speaker 1: five basis points. And then and then you don't have 567 00:31:16,680 --> 00:31:18,520 Speaker 1: any of these issues. And you know, that's why I 568 00:31:18,560 --> 00:31:21,200 Speaker 1: have been arguing in in my in my recent pieces 569 00:31:21,240 --> 00:31:24,520 Speaker 1: that far more important than raising the price on the 570 00:31:24,560 --> 00:31:28,280 Speaker 1: reversaryport facility is to uncapt the use of that facility, 571 00:31:28,400 --> 00:31:30,680 Speaker 1: because you know, if you can only place x amount 572 00:31:30,680 --> 00:31:33,840 Speaker 1: of five at five basis points, once you're beyond that amount, 573 00:31:34,320 --> 00:31:36,880 Speaker 1: you will be lending cash at rades less than five 574 00:31:36,920 --> 00:31:38,920 Speaker 1: basis points. And you still get into this dynamics that 575 00:31:39,000 --> 00:31:59,040 Speaker 1: it's talking about. So we've been talking a lot about plumbing, obviously, 576 00:31:59,080 --> 00:32:02,000 Speaker 1: and this is sort of, uh, the key story and 577 00:32:02,080 --> 00:32:04,120 Speaker 1: the issue of like where to put all this extra 578 00:32:04,200 --> 00:32:07,320 Speaker 1: cash and the lack of vehicles to place it. You know, 579 00:32:07,360 --> 00:32:09,120 Speaker 1: we just have we have a few minutes left before 580 00:32:09,160 --> 00:32:11,280 Speaker 1: we go. I want to get back to something. You 581 00:32:11,280 --> 00:32:13,120 Speaker 1: know in your first answer, we talked a little bit 582 00:32:13,160 --> 00:32:16,560 Speaker 1: also about positioning and how low rates the only way 583 00:32:16,560 --> 00:32:19,480 Speaker 1: to compensate for low rates is leverage. Some of the 584 00:32:19,560 --> 00:32:23,200 Speaker 1: issues with Australian investors having to short the U S. 585 00:32:23,240 --> 00:32:27,200 Speaker 1: Treasury market to sort of hedge the fact that the 586 00:32:27,200 --> 00:32:30,720 Speaker 1: the belly of the Australian curve was blowing out. Let's 587 00:32:31,040 --> 00:32:32,880 Speaker 1: go back a little bit to that, and how much 588 00:32:33,040 --> 00:32:34,800 Speaker 1: is that part of the story of this sort of 589 00:32:34,840 --> 00:32:39,840 Speaker 1: concentrated positioning um C t A flows uh. And how 590 00:32:39,920 --> 00:32:42,160 Speaker 1: much is that part of the story that we've seen, 591 00:32:42,280 --> 00:32:44,720 Speaker 1: and how much of that is still built up? How 592 00:32:44,760 --> 00:32:47,320 Speaker 1: much pent up sort of tension is there? And how 593 00:32:47,440 --> 00:32:51,640 Speaker 1: much is that dissipated with last week's shock. Look, I 594 00:32:51,680 --> 00:32:55,320 Speaker 1: think I think a lot of it has. The positions 595 00:32:55,320 --> 00:32:58,960 Speaker 1: have shrunk, right, so short of the belly along the 596 00:32:59,000 --> 00:33:05,000 Speaker 1: back end, I think those positions have been downsized, um 597 00:33:05,520 --> 00:33:09,120 Speaker 1: relative to last week. I think I think we also 598 00:33:10,040 --> 00:33:13,040 Speaker 1: had this again this episode of you know, what's how 599 00:33:13,160 --> 00:33:17,000 Speaker 1: committed our central banks to keeping you know, in the 600 00:33:17,040 --> 00:33:20,040 Speaker 1: case of the r B a rates in the belly anchored. 601 00:33:20,080 --> 00:33:22,520 Speaker 1: And I think you know, the central banks have spoken 602 00:33:22,520 --> 00:33:25,120 Speaker 1: loud and clear. You know, the ECB has spoken loud 603 00:33:25,120 --> 00:33:26,720 Speaker 1: and clear about you know, they don't want any of 604 00:33:26,760 --> 00:33:31,000 Speaker 1: their yields going higher. Either. The set hasn't really said anything. 605 00:33:31,680 --> 00:33:33,640 Speaker 1: And frankly, you know, I don't think I don't think 606 00:33:33,640 --> 00:33:36,120 Speaker 1: that they should. I mean maybe even even I was 607 00:33:36,240 --> 00:33:38,240 Speaker 1: I was a bit too fast last week, you know, 608 00:33:38,360 --> 00:33:40,360 Speaker 1: saying that, Well, one thing that the fest could do 609 00:33:40,480 --> 00:33:44,720 Speaker 1: is a talk rates down, do something like an operation twist, 610 00:33:45,400 --> 00:33:47,600 Speaker 1: you know, self front and stuff and buy back and 611 00:33:47,680 --> 00:33:50,320 Speaker 1: stuff to the police belong and but but here's the point, 612 00:33:50,640 --> 00:33:52,080 Speaker 1: you know, the long and you don't really need to 613 00:33:52,120 --> 00:33:55,000 Speaker 1: police because what you have seen is that you have 614 00:33:55,160 --> 00:33:58,800 Speaker 1: this massive sell off. But then you know, the the 615 00:33:58,800 --> 00:34:01,320 Speaker 1: the fics hedged bys that we talk a lot about 616 00:34:01,800 --> 00:34:04,760 Speaker 1: on this show, at least when I come on, is 617 00:34:05,080 --> 00:34:07,600 Speaker 1: you know, they are now getting a beautiful amount of 618 00:34:07,640 --> 00:34:10,520 Speaker 1: slope in the treasury curve. And and again keep in 619 00:34:10,560 --> 00:34:13,000 Speaker 1: mind every time you talk about all these cash coming 620 00:34:13,000 --> 00:34:16,080 Speaker 1: into the system, you know, Bill yields going negative. That 621 00:34:16,120 --> 00:34:18,640 Speaker 1: means that these hedging costs are going to be very 622 00:34:18,680 --> 00:34:20,960 Speaker 1: well anchored and if anything, they are going to be 623 00:34:20,960 --> 00:34:24,160 Speaker 1: going going lower. So basically, you know the sell off 624 00:34:24,680 --> 00:34:26,920 Speaker 1: that happened last year, you know, some guys were shaking 625 00:34:26,920 --> 00:34:29,160 Speaker 1: out of their positions, but that was an opportunity for 626 00:34:29,200 --> 00:34:31,680 Speaker 1: another set of buyers because if you look at these 627 00:34:31,680 --> 00:34:34,520 Speaker 1: effects hedged yields, I mean we are back to levels 628 00:34:34,520 --> 00:34:38,239 Speaker 1: where we had last time, being in twenty fifteen. And 629 00:34:38,320 --> 00:34:39,920 Speaker 1: you know that's just great because you know when you 630 00:34:39,960 --> 00:34:43,000 Speaker 1: look at yields in Japan and you look at yields 631 00:34:43,040 --> 00:34:45,799 Speaker 1: in Europe, I mean those are still abysmal. Right, So 632 00:34:45,840 --> 00:34:49,359 Speaker 1: any fixed income allocator is going to look at these 633 00:34:49,360 --> 00:34:52,960 Speaker 1: types of sell offs um with great excitement. And that's 634 00:34:53,000 --> 00:34:55,600 Speaker 1: that that was a part of the self healing mechanism. 635 00:34:55,640 --> 00:34:58,040 Speaker 1: And you know, on Thursday we had a bad day, 636 00:34:58,080 --> 00:35:01,759 Speaker 1: but Friday and since then we've been having uh you know, 637 00:35:01,880 --> 00:35:04,960 Speaker 1: great great price section in in treasury. So again, you know, 638 00:35:05,040 --> 00:35:07,959 Speaker 1: some people win, some people lose, But I don't think 639 00:35:07,960 --> 00:35:12,640 Speaker 1: that that the sets should do anything about this. And again, 640 00:35:12,800 --> 00:35:14,560 Speaker 1: you know, I think I think there will be a 641 00:35:14,600 --> 00:35:18,239 Speaker 1: couple of these um instances where you know, as the 642 00:35:18,280 --> 00:35:21,200 Speaker 1: inflation narrative and the reflation narrative is not going to 643 00:35:21,280 --> 00:35:24,120 Speaker 1: go away anytime soon. You know, that's going to drive 644 00:35:24,600 --> 00:35:26,880 Speaker 1: field curve dynamics. I think you know that's that's a 645 00:35:26,920 --> 00:35:30,480 Speaker 1: part of the that's a part of the future out 646 00:35:30,480 --> 00:35:32,600 Speaker 1: But I'm not sure that you know, the said should 647 00:35:32,680 --> 00:35:36,280 Speaker 1: do anything explicit about it. I think, you know, even 648 00:35:36,360 --> 00:35:39,960 Speaker 1: even I think I even regret saying, let's be that, 649 00:35:40,120 --> 00:35:41,640 Speaker 1: you know, one of the things that the pet should do, 650 00:35:41,680 --> 00:35:44,680 Speaker 1: they talk it down, be do operation twist im And 651 00:35:44,800 --> 00:35:47,160 Speaker 1: sometimes you get bound up in the emotions of the markets. 652 00:35:47,600 --> 00:35:49,880 Speaker 1: You know, the market has theres a lot of you know, 653 00:35:49,960 --> 00:35:53,600 Speaker 1: self healing properties, right and again, you know, the losses 654 00:35:53,640 --> 00:35:57,120 Speaker 1: for some investors were an opportunity for the ATHLETs buyers 655 00:35:57,520 --> 00:36:00,399 Speaker 1: later on, you know, on Friday, and and and that's 656 00:36:00,400 --> 00:36:02,759 Speaker 1: so far to seek. So I want to go back 657 00:36:02,760 --> 00:36:07,600 Speaker 1: to the start of our discussion and just talk very 658 00:36:07,719 --> 00:36:11,480 Speaker 1: very broadly about the strength of the U. S. Treasury 659 00:36:11,520 --> 00:36:16,879 Speaker 1: market in terms of actual structure and the plumbing. We've 660 00:36:16,920 --> 00:36:21,480 Speaker 1: seen these instances where liquidity seems to evaporate, and you know, 661 00:36:21,560 --> 00:36:23,839 Speaker 1: last week wasn't necessarily as bad as what we saw 662 00:36:23,880 --> 00:36:26,239 Speaker 1: in March, but we did see bid ask spreads on 663 00:36:26,239 --> 00:36:31,239 Speaker 1: treasuries start to blow out. How concerned are you about, 664 00:36:32,000 --> 00:36:35,279 Speaker 1: I guess the structure of the treasury market or liquidity 665 00:36:35,320 --> 00:36:40,200 Speaker 1: within the treasury market generally. You know, I think I 666 00:36:40,200 --> 00:36:43,400 Speaker 1: think it's a philosophical question. I think, you know, markets 667 00:36:45,239 --> 00:36:49,680 Speaker 1: are not supposed to be about no volatility at all. 668 00:36:50,080 --> 00:36:53,560 Speaker 1: In fact, I think is a is a healthy phenomenon. 669 00:36:53,640 --> 00:36:56,120 Speaker 1: And you know, I just don't think moves that we 670 00:36:56,200 --> 00:36:59,920 Speaker 1: have seen last week. I mean, again, you know, markets 671 00:37:00,160 --> 00:37:02,600 Speaker 1: go from one extreme to another. But but for as 672 00:37:02,640 --> 00:37:06,239 Speaker 1: long as there is a you know, mechanism whereby some 673 00:37:07,080 --> 00:37:09,960 Speaker 1: value based investory is going to provide an outside spread 674 00:37:10,480 --> 00:37:13,200 Speaker 1: and put a lid on things, that's great. And I think, 675 00:37:13,280 --> 00:37:16,560 Speaker 1: you know what, what what I think happened less weak 676 00:37:16,680 --> 00:37:19,680 Speaker 1: is actually you know, I tend to focus on, you know, 677 00:37:19,719 --> 00:37:23,719 Speaker 1: the self healing properties of the market, and from that perspective, 678 00:37:23,880 --> 00:37:26,799 Speaker 1: I think that the market work fine. It's just that 679 00:37:26,880 --> 00:37:29,480 Speaker 1: you know, some leveled players were shaken out of their 680 00:37:29,520 --> 00:37:34,080 Speaker 1: position because you know, the market perception of of how 681 00:37:34,120 --> 00:37:38,560 Speaker 1: committed central banks or two to keeping rates low has 682 00:37:39,120 --> 00:37:41,879 Speaker 1: has changed. And then you know, central banks basically when 683 00:37:41,880 --> 00:37:44,719 Speaker 1: the other way, and and and and the market the 684 00:37:44,760 --> 00:37:48,000 Speaker 1: market calm down, So you know, I wouldn't point to 685 00:37:48,640 --> 00:37:50,799 Speaker 1: you know, there's too much regulation and that's why the 686 00:37:50,800 --> 00:37:54,160 Speaker 1: market is creating this way, or or or any of that. 687 00:37:54,239 --> 00:37:57,440 Speaker 1: I think. I think it's just it's just a healthy development. 688 00:37:57,440 --> 00:37:59,400 Speaker 1: I mean, it's not comfortable, especially if you're on the 689 00:37:59,400 --> 00:38:03,799 Speaker 1: wrong side of trade. But I don't think, but I 690 00:38:03,840 --> 00:38:07,399 Speaker 1: don't think that that we should be going um down 691 00:38:07,440 --> 00:38:09,759 Speaker 1: a path where, you know, we need to redesign the 692 00:38:09,800 --> 00:38:14,560 Speaker 1: treasury market because there is occasional basketball activity in it. Well, Sultan, 693 00:38:14,719 --> 00:38:17,080 Speaker 1: I think that's a great place to leave it, and 694 00:38:17,560 --> 00:38:19,680 Speaker 1: we could always talk to you for a few hours. 695 00:38:19,960 --> 00:38:22,920 Speaker 1: Thank you so much for coming on. We appreciate it. 696 00:38:23,280 --> 00:38:25,880 Speaker 1: Thanks that was really great. Thank you very much for 697 00:38:25,920 --> 00:38:49,239 Speaker 1: having me, guys, so Joe. It's always great having Sultan on. 698 00:38:49,440 --> 00:38:52,840 Speaker 1: And his explanation of the price action last week was 699 00:38:52,880 --> 00:38:56,719 Speaker 1: probably the clearest one that I've seen so far. And 700 00:38:56,800 --> 00:38:58,480 Speaker 1: you know, a lot of people were sort of freaking 701 00:38:58,520 --> 00:39:02,680 Speaker 1: out about this being a central bank miscommunication or the 702 00:39:02,760 --> 00:39:06,960 Speaker 1: taper tantrum re ducts, but actually, like if anything, it 703 00:39:07,239 --> 00:39:12,760 Speaker 1: resembled a sort of technical shift in positioning as levered players, 704 00:39:12,920 --> 00:39:16,719 Speaker 1: you know, rethought their bets. Yeah, there's always a lot 705 00:39:16,800 --> 00:39:20,160 Speaker 1: of when rates move violently, you know, we can't really 706 00:39:20,200 --> 00:39:24,960 Speaker 1: help but ascribe some sort of deep economic significance to them, 707 00:39:25,040 --> 00:39:28,320 Speaker 1: and people love narratives about all the bond market is 708 00:39:28,400 --> 00:39:32,760 Speaker 1: challenging the FED or inflation or maybe something with fiscal policy, 709 00:39:32,840 --> 00:39:35,840 Speaker 1: and I guess that's always there to some extent, and 710 00:39:35,960 --> 00:39:40,839 Speaker 1: perhaps um this sort of the difficulties in communication that 711 00:39:40,960 --> 00:39:45,520 Speaker 1: maybe the the Antipodaean central banks have had in New 712 00:39:45,600 --> 00:39:49,359 Speaker 1: Zealand and Australia kicking things off, they've had sort of 713 00:39:49,400 --> 00:39:53,279 Speaker 1: problems with communicating about their medium term rate path. But 714 00:39:53,360 --> 00:39:55,680 Speaker 1: in the end, like when you have a bunch of 715 00:39:55,719 --> 00:39:58,640 Speaker 1: people who are all levered into sort of roughly the 716 00:39:58,800 --> 00:40:02,359 Speaker 1: same positioning, and you have these other clouds hanging over 717 00:40:02,400 --> 00:40:06,040 Speaker 1: the market, such as the questions about the SLR that 718 00:40:06,239 --> 00:40:08,640 Speaker 1: a long described you can just get stuff. It doesn't 719 00:40:08,680 --> 00:40:12,960 Speaker 1: always necessarily have to have sort of meaning per se. Right, 720 00:40:13,120 --> 00:40:16,520 Speaker 1: It's sort of the the game stop equivalent for the 721 00:40:16,560 --> 00:40:21,120 Speaker 1: treasury market. Sometimes things just happen, yeah, and it doesn't 722 00:40:21,160 --> 00:40:25,479 Speaker 1: necessarily mean no, that's the decab I actually thought about 723 00:40:25,480 --> 00:40:28,799 Speaker 1: it with respective games stop it's like something sometimes things 724 00:40:28,920 --> 00:40:31,040 Speaker 1: just happened, and just in the same way everyone was like, oh, 725 00:40:31,080 --> 00:40:33,840 Speaker 1: this is class warfare or this says something about T 726 00:40:33,920 --> 00:40:36,240 Speaker 1: plus two. It's like, yeah, but sometimes things just happened 727 00:40:36,280 --> 00:40:40,560 Speaker 1: in market. Um, what was I gonna say? Oh? Yeah. 728 00:40:40,680 --> 00:40:42,560 Speaker 1: I also thought it was great that Salton kind of 729 00:40:42,640 --> 00:40:45,400 Speaker 1: I mean, just on the point about the bond market 730 00:40:45,520 --> 00:40:48,680 Speaker 1: challenging the Fed, which was a narrative that we saw 731 00:40:48,840 --> 00:40:51,440 Speaker 1: come out in some commentary next week. You know, the 732 00:40:51,440 --> 00:40:54,560 Speaker 1: Fed can't control the bond market. The bond vigilantes have 733 00:40:54,719 --> 00:40:59,439 Speaker 1: returned that sort of thing. I thought it was really interesting. Um, 734 00:40:59,520 --> 00:41:03,920 Speaker 1: that's old, and basically said that he regretted writing last 735 00:41:03,920 --> 00:41:06,200 Speaker 1: week that the FED could do an operation Twist or 736 00:41:06,239 --> 00:41:09,400 Speaker 1: something like that to keep a cap on bond deals. 737 00:41:09,440 --> 00:41:12,319 Speaker 1: Like he sort of admitted that he was caught up 738 00:41:12,360 --> 00:41:15,839 Speaker 1: in the moment and that things have changed. But but 739 00:41:15,880 --> 00:41:18,200 Speaker 1: that's like it's not something that you hear from a 740 00:41:18,239 --> 00:41:22,359 Speaker 1: lot of analysts necessarily that sort of honesty. No, totally right. 741 00:41:22,440 --> 00:41:25,080 Speaker 1: And also this idea, it's like, look like, bonds are 742 00:41:25,080 --> 00:41:28,160 Speaker 1: not equities and they do have, as he pointed out, 743 00:41:28,239 --> 00:41:32,600 Speaker 1: this sort of um natural curve mechanism and we have 744 00:41:32,800 --> 00:41:36,920 Speaker 1: gotten to the point where there's steepness in the curves 745 00:41:37,000 --> 00:41:41,439 Speaker 1: such that for foreign FECs hedged buyers there is now 746 00:41:41,680 --> 00:41:44,480 Speaker 1: value there. A new set of bidders comes in. So 747 00:41:44,840 --> 00:41:47,600 Speaker 1: you know, with a cut, with a with game stop, 748 00:41:47,719 --> 00:41:51,319 Speaker 1: you can have an extremely long period of time in 749 00:41:51,360 --> 00:41:55,080 Speaker 1: which the underlying in which the value of the security 750 00:41:55,120 --> 00:41:59,839 Speaker 1: is extremely divorced from anything resembling fundamentals. And it really 751 00:42:00,000 --> 00:42:02,960 Speaker 1: seems much harder to have that. It's why it's hard 752 00:42:03,000 --> 00:42:06,200 Speaker 1: to like really even imagine what like a treasury bubble 753 00:42:06,360 --> 00:42:09,719 Speaker 1: would mean, because you do have these sort of natural 754 00:42:09,800 --> 00:42:12,600 Speaker 1: buyers that come in at certain levels. If you get 755 00:42:12,680 --> 00:42:17,520 Speaker 1: a disconnect, and disconnects do happen between fundamentals and raids 756 00:42:18,480 --> 00:42:22,359 Speaker 1: very quickly, Uh, new sources of money emerge in one 757 00:42:22,400 --> 00:42:25,640 Speaker 1: direction or another, and you don't get the movie going 758 00:42:25,680 --> 00:42:29,160 Speaker 1: on forever. I just had a great idea for a 759 00:42:29,200 --> 00:42:32,960 Speaker 1: financial market novel, which would be, you know, a scenario 760 00:42:33,080 --> 00:42:35,640 Speaker 1: in which Wall Street bets tries to take on the 761 00:42:35,680 --> 00:42:39,440 Speaker 1: treasury market and force a squeeze. That'd be interesting. Twenty 762 00:42:39,440 --> 00:42:44,160 Speaker 1: one trillion dollar market versus creditors. Maybe we should write 763 00:42:44,200 --> 00:42:46,319 Speaker 1: a novel together. We've we've never been able to come 764 00:42:46,400 --> 00:42:48,480 Speaker 1: up with a good idea for a like proper finance 765 00:42:48,560 --> 00:42:51,000 Speaker 1: book together. Maybe the answer is a novel. Let's just 766 00:42:51,040 --> 00:42:55,000 Speaker 1: go the fiction route. I'd be up for you. All right, okay, 767 00:42:55,360 --> 00:42:58,360 Speaker 1: this has been another episode of the All Thoughts podcast. 768 00:42:58,440 --> 00:43:01,160 Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at 769 00:43:01,160 --> 00:43:03,719 Speaker 1: Tracy Halloway and I'm Joe wi Isn't though. You can 770 00:43:03,800 --> 00:43:07,080 Speaker 1: follow me on Twitter at the Stalwart. Follow our producer 771 00:43:07,160 --> 00:43:11,280 Speaker 1: Laura Carlson on Twitter. She's at Laura M. Carlson. Followed 772 00:43:11,280 --> 00:43:14,960 Speaker 1: the Bloomberg Ahead of podcast Francesca Levie at Francesco Today, 773 00:43:15,400 --> 00:43:18,239 Speaker 1: and check out all of our podcasts at Bloomberg under 774 00:43:18,280 --> 00:43:20,880 Speaker 1: the handle at podcasts. Thanks for listening.