1 00:00:11,160 --> 00:00:14,920 Speaker 1: Hello, and welcome to another episode of the Odd Thoughts podcast. 2 00:00:15,040 --> 00:00:18,640 Speaker 1: I'm Tracy Alloway. My co host Joe Wisenthal is away 3 00:00:18,680 --> 00:00:23,920 Speaker 1: this week. I am recording this on September one, which 4 00:00:24,000 --> 00:00:28,120 Speaker 1: means it is the start of a new quarter. And 5 00:00:28,200 --> 00:00:30,880 Speaker 1: whenever we have the start of a new quarter, it's 6 00:00:31,040 --> 00:00:34,360 Speaker 1: usually a time to start reflecting on what's happening in 7 00:00:34,440 --> 00:00:38,120 Speaker 1: money markets. And there has been a lot happening in 8 00:00:38,240 --> 00:00:41,559 Speaker 1: money markets so far this year. So you know, just 9 00:00:41,640 --> 00:00:46,320 Speaker 1: today we have a d two participants placing one point 10 00:00:46,440 --> 00:00:53,120 Speaker 1: one nine trillion dollars at the FEDS Reverse Repurchase Agreement Facility, 11 00:00:53,440 --> 00:00:56,800 Speaker 1: the Reverse Repo Facility UM. And I have to say, 12 00:00:57,440 --> 00:01:00,280 Speaker 1: the US financial system right now is kind of a 13 00:01:00,400 --> 00:01:03,760 Speaker 1: wash in liquidity, and it has been for some time, 14 00:01:04,520 --> 00:01:07,800 Speaker 1: and that's causing problems for banks who have to handle 15 00:01:07,840 --> 00:01:11,520 Speaker 1: all these deposits, problems for money market funds, and of 16 00:01:11,560 --> 00:01:15,119 Speaker 1: course problems for the FED. So all this liquidity means 17 00:01:15,200 --> 00:01:19,199 Speaker 1: that money market rates have basically been pressured lower all 18 00:01:19,319 --> 00:01:22,679 Speaker 1: year UM, so much so that the FED has actually 19 00:01:22,720 --> 00:01:26,040 Speaker 1: had to tweak some of its facilities, including the reverse 20 00:01:26,080 --> 00:01:29,520 Speaker 1: repot facility, back in June to prevent those rates from 21 00:01:29,520 --> 00:01:33,400 Speaker 1: going even lower and more recently it surprised the market 22 00:01:33,680 --> 00:01:39,160 Speaker 1: by introducing a standing repot facility. So we have had 23 00:01:39,200 --> 00:01:42,320 Speaker 1: a lot of requests to talk about this on all lots, 24 00:01:42,360 --> 00:01:45,559 Speaker 1: and no surprise, we've had requests to speak to one 25 00:01:45,640 --> 00:01:50,360 Speaker 1: person in particular, repeat all loots guests, We're gonna be 26 00:01:50,400 --> 00:01:53,720 Speaker 1: talking to re Sultan Posar, of course, the equobal head 27 00:01:53,760 --> 00:01:57,560 Speaker 1: of short term interest rates over at Credit Swiss. Sultan, 28 00:01:57,800 --> 00:02:00,840 Speaker 1: welcome to the show again. Thank you very much for 29 00:02:00,880 --> 00:02:04,480 Speaker 1: having me back. So I'm trying to think where to start, 30 00:02:04,560 --> 00:02:09,160 Speaker 1: but maybe you could begin by describing the general state 31 00:02:09,760 --> 00:02:13,560 Speaker 1: of liquidity and money markets at the moment. Like when 32 00:02:13,560 --> 00:02:17,560 Speaker 1: I say the financial system is a wash in liquidity, 33 00:02:17,760 --> 00:02:21,160 Speaker 1: what exactly do we mean the general What is the 34 00:02:21,160 --> 00:02:25,000 Speaker 1: general state? The general state is things that haven't happened 35 00:02:25,000 --> 00:02:29,680 Speaker 1: before are now happening. So so again, let's let's perhaps 36 00:02:29,680 --> 00:02:32,280 Speaker 1: start with cross curency basis. This is something that we 37 00:02:32,320 --> 00:02:34,960 Speaker 1: are used to as as being very negative. You know, 38 00:02:35,000 --> 00:02:39,280 Speaker 1: there is also there's always an excess demand for dollars, 39 00:02:39,320 --> 00:02:42,239 Speaker 1: and that excess demand for for for dollars has gone 40 00:02:42,280 --> 00:02:45,440 Speaker 1: to cross curency basis is pretty much closed. You have 41 00:02:45,560 --> 00:02:49,280 Speaker 1: some jurisdictions smaller countries for the cross currency basis is 42 00:02:49,320 --> 00:02:55,160 Speaker 1: even positive Mexico, South Africa, in China's you know, these 43 00:02:55,160 --> 00:02:58,239 Speaker 1: are these are these are quite unusual things. Library is 44 00:02:58,440 --> 00:03:01,800 Speaker 1: dormant and in the base still wise is three basis 45 00:03:01,800 --> 00:03:06,080 Speaker 1: points very tight. People and bill yields are are very low. 46 00:03:06,160 --> 00:03:08,399 Speaker 1: And you know, but this, but this is a reflection 47 00:03:08,400 --> 00:03:11,239 Speaker 1: of the is naturally just you know, too much cash 48 00:03:11,480 --> 00:03:15,480 Speaker 1: in the system relative to demand for this funny you know, 49 00:03:15,680 --> 00:03:18,480 Speaker 1: I think, unfortunately, I think we are in a period 50 00:03:18,480 --> 00:03:21,400 Speaker 1: where things are going to be very different for quite 51 00:03:21,440 --> 00:03:24,440 Speaker 1: some time relative to how things were over the past 52 00:03:24,480 --> 00:03:27,280 Speaker 1: five years. I think over the past five years we've 53 00:03:27,280 --> 00:03:31,320 Speaker 1: had sort of a golden era for stir traders because 54 00:03:31,360 --> 00:03:34,280 Speaker 1: we've had so many, so many spread moves in the 55 00:03:34,280 --> 00:03:37,320 Speaker 1: money markets. You know, the liboiary basis or the cross 56 00:03:37,320 --> 00:03:40,480 Speaker 1: currency basis has done. You know, the people markets acted 57 00:03:40,480 --> 00:03:43,400 Speaker 1: out in the past. But if you think about why 58 00:03:44,040 --> 00:03:48,040 Speaker 1: liquidity was tight as opposed to abundance, they're basically three weeks. 59 00:03:48,960 --> 00:03:52,640 Speaker 1: You know, the FED stubbed QUEI in twenty fifteen, and 60 00:03:52,680 --> 00:03:55,480 Speaker 1: then the ECB and the d o J were just starting. 61 00:03:55,520 --> 00:03:57,520 Speaker 1: So we were in this position where there was an 62 00:03:57,520 --> 00:03:59,600 Speaker 1: excess supply of euro and a end people didn't know 63 00:03:59,640 --> 00:04:02,360 Speaker 1: what to do. The responsed for dollars, so that rope 64 00:04:02,480 --> 00:04:05,520 Speaker 1: that that special as the dollar in in the xpot market. 65 00:04:06,320 --> 00:04:09,400 Speaker 1: Then we had fossil free that was getting rolled out, 66 00:04:10,000 --> 00:04:13,760 Speaker 1: and so nobody understood that, right, So you had this 67 00:04:13,880 --> 00:04:18,279 Speaker 1: relative shortage of dogs combined with an ever growing shortage 68 00:04:18,279 --> 00:04:21,760 Speaker 1: of balance sheet for various parts of basil getting rolled 69 00:04:21,800 --> 00:04:25,440 Speaker 1: out l C R, SLR GC S. Course, you know, 70 00:04:25,480 --> 00:04:28,520 Speaker 1: the banks themselves had to learn how to manage these ratios, 71 00:04:28,720 --> 00:04:32,640 Speaker 1: the market learn how to trade these ratios, and then 72 00:04:32,680 --> 00:04:37,239 Speaker 1: we had these little idiosyncredic things like money funderform, corporate 73 00:04:37,320 --> 00:04:39,720 Speaker 1: text reform, and so these rollways back in the rent 74 00:04:39,960 --> 00:04:42,280 Speaker 1: some of the most experienced STIR traitors will tell you 75 00:04:42,320 --> 00:04:45,039 Speaker 1: that they've never traded as much front and basis in 76 00:04:45,080 --> 00:04:48,000 Speaker 1: their career. You know, some of those careers spent thirty 77 00:04:48,080 --> 00:04:52,160 Speaker 1: years as they did between twenty fifteen, and so then 78 00:04:52,200 --> 00:04:57,280 Speaker 1: you fast forward to today. We now have so much liquidity. Uh, 79 00:04:57,320 --> 00:04:59,760 Speaker 1: and this is this is particularly a case for the US. 80 00:04:59,800 --> 00:05:03,760 Speaker 1: Do learn that you know, the FED is doing que 81 00:05:04,200 --> 00:05:06,839 Speaker 1: faster than than the B O J or the E 82 00:05:06,920 --> 00:05:09,159 Speaker 1: C B. So so there is, there's just an ample 83 00:05:09,200 --> 00:05:13,159 Speaker 1: supply view as dollars. Regulations are not getting tighter, if anything, 84 00:05:13,279 --> 00:05:17,279 Speaker 1: they are getting easier. The FED has become a dealer 85 00:05:17,320 --> 00:05:19,920 Speaker 1: of less resorts, the swap mindes. We have the standing 86 00:05:19,960 --> 00:05:23,320 Speaker 1: people facility before banks. We have to standing people facility 87 00:05:23,400 --> 00:05:26,719 Speaker 1: for foreign central banks. So so this is a very 88 00:05:26,720 --> 00:05:29,640 Speaker 1: different environment. And then in the midst of this, you know, 89 00:05:29,880 --> 00:05:31,960 Speaker 1: a lot of the community, a lot of balance sheets, 90 00:05:32,800 --> 00:05:36,240 Speaker 1: a lot of excess cassion systems. There's also you know, 91 00:05:36,320 --> 00:05:38,640 Speaker 1: not as much activity in the world economy that needs 92 00:05:38,640 --> 00:05:42,520 Speaker 1: to get announced. So if you just think about why 93 00:05:42,720 --> 00:05:46,080 Speaker 1: foreign banks elsewhere, you know, borrow dollars because they need 94 00:05:46,120 --> 00:05:51,040 Speaker 1: to finance traight those or or whatnot's death demand is dormant. 95 00:05:51,160 --> 00:05:53,920 Speaker 1: I think I think capital clothes are a bit more domestic. 96 00:05:54,160 --> 00:05:56,160 Speaker 1: You know, the the FX hedge cloths are not as 97 00:05:56,360 --> 00:06:00,360 Speaker 1: dominant as they the relative value hedge funds a kind 98 00:06:00,360 --> 00:06:03,000 Speaker 1: of checked out at the moment because there's not a 99 00:06:03,000 --> 00:06:06,240 Speaker 1: lot of opportunities and so you know, there's you know, 100 00:06:06,279 --> 00:06:09,159 Speaker 1: the best reflection of of all these sex cases you 101 00:06:09,240 --> 00:06:11,480 Speaker 1: mentioned is all this one point actually, and that is 102 00:06:11,520 --> 00:06:14,000 Speaker 1: of cash that's sitting in the report facility that you 103 00:06:14,440 --> 00:06:18,360 Speaker 1: literally want to think about as money the system doesn't need, 104 00:06:18,400 --> 00:06:20,680 Speaker 1: either because it doesn't have the balance sheet for it, 105 00:06:20,800 --> 00:06:23,960 Speaker 1: or because there's no use or outfit for that money. 106 00:06:24,200 --> 00:06:26,120 Speaker 1: All right, This brings me to my next question, because 107 00:06:26,120 --> 00:06:28,520 Speaker 1: I think a lot of people when they hear that 108 00:06:28,560 --> 00:06:32,760 Speaker 1: the system is a washing liquidity, there's all this excess cash, 109 00:06:32,880 --> 00:06:36,360 Speaker 1: a lot of people wouldn't necessarily think that's a bad thing. 110 00:06:36,560 --> 00:06:39,240 Speaker 1: And yet you know, clearly this is something that the 111 00:06:39,279 --> 00:06:42,520 Speaker 1: Fed at least has been responding to. Um I mentioned 112 00:06:42,520 --> 00:06:44,720 Speaker 1: that it tweaked the reverse reboth facility and then it 113 00:06:44,800 --> 00:06:50,800 Speaker 1: started the standing repo facilities. What exactly is the problem here? Well, 114 00:06:51,160 --> 00:06:53,599 Speaker 1: I wouldn't say that it's a problem. I think that 115 00:06:53,680 --> 00:06:56,760 Speaker 1: the way I think that the way all this is 116 00:06:56,800 --> 00:07:00,360 Speaker 1: clearing in the system is actually quite do you beutiful 117 00:07:00,360 --> 00:07:04,320 Speaker 1: and kind of hastlement and problem free? I think you're 118 00:07:04,360 --> 00:07:07,880 Speaker 1: the only person that would describe us as beautiful. Well, look, 119 00:07:07,880 --> 00:07:12,480 Speaker 1: I think it's beautiful because you know, the designed the 120 00:07:12,640 --> 00:07:15,240 Speaker 1: system basically, so you know, I mean, you put you 121 00:07:15,280 --> 00:07:17,440 Speaker 1: put reserves in. You know, the central bank is a 122 00:07:17,480 --> 00:07:20,680 Speaker 1: balance sheet, and then someone has to hold the liabilities 123 00:07:20,720 --> 00:07:23,800 Speaker 1: of central bank, and we have a beautiful mechanism where 124 00:07:24,200 --> 00:07:27,240 Speaker 1: you know this money is going to flow through the 125 00:07:27,240 --> 00:07:30,040 Speaker 1: past path of reefs, resistance to whoever has the balance 126 00:07:30,480 --> 00:07:32,360 Speaker 1: and so and so that's what we're seeing. And again 127 00:07:32,440 --> 00:07:35,920 Speaker 1: you know the reverse reple facility. You literally want to 128 00:07:35,960 --> 00:07:39,800 Speaker 1: think about there as foam on the runway, So it 129 00:07:39,840 --> 00:07:43,600 Speaker 1: doesn't matter how big a plane you're gonna eventually crashed 130 00:07:43,640 --> 00:07:45,920 Speaker 1: on the runway. There's a lot of foam there, so 131 00:07:45,960 --> 00:07:49,120 Speaker 1: the impact is not going to be painful. So what 132 00:07:49,160 --> 00:07:51,640 Speaker 1: do I mean by that? You know, people people talk 133 00:07:51,680 --> 00:07:55,520 Speaker 1: about let's find let's find some some you know, stread 134 00:07:55,560 --> 00:07:58,600 Speaker 1: opportunity we can trade in the money. Maybe there's gonna 135 00:07:58,600 --> 00:08:01,320 Speaker 1: be a run on teather and you know that that 136 00:08:01,360 --> 00:08:03,640 Speaker 1: tater is going to have to sell you know, sixty 137 00:08:03,680 --> 00:08:06,400 Speaker 1: billion dollars of commership or something like that. I mean, 138 00:08:06,440 --> 00:08:09,080 Speaker 1: you know, there these ideas floating out there because we 139 00:08:09,160 --> 00:08:11,800 Speaker 1: don't really have a lot of ideas to trade. So 140 00:08:12,240 --> 00:08:15,560 Speaker 1: what would happen in such a scenario? Nothing? I mean 141 00:08:15,960 --> 00:08:19,320 Speaker 1: on money fund complex that has one point two trillion 142 00:08:19,360 --> 00:08:23,400 Speaker 1: dollars stashed away at the at the reverse ory earning 143 00:08:23,440 --> 00:08:26,720 Speaker 1: five basis points whatever this location you go hav in 144 00:08:26,720 --> 00:08:29,600 Speaker 1: the CP market from someone having to sell sixty billion 145 00:08:29,640 --> 00:08:33,520 Speaker 1: dollars commercial paper hypothetically is going to be scooped up 146 00:08:33,840 --> 00:08:36,839 Speaker 1: and they will be asking for more opportunities like that, right, 147 00:08:36,840 --> 00:08:39,160 Speaker 1: So this is this is just exper cash that will 148 00:08:39,240 --> 00:08:44,000 Speaker 1: be there too to get deployed to to harvest whatever 149 00:08:44,360 --> 00:08:48,440 Speaker 1: spread having affex swamps or or or spy or live 150 00:08:48,559 --> 00:08:51,960 Speaker 1: or or so so that's a lot. Now people often 151 00:08:52,000 --> 00:08:54,120 Speaker 1: bring up, you know, this is a problem for the banks, 152 00:08:54,160 --> 00:08:56,480 Speaker 1: but again this is not really a problem for the banks, 153 00:08:56,559 --> 00:09:00,120 Speaker 1: because you know, the banks now have again and I 154 00:09:00,120 --> 00:09:04,640 Speaker 1: think it's quite beautiful a mechanism whereby if in the 155 00:09:04,679 --> 00:09:08,000 Speaker 1: morning they have cash coming in that they don't have 156 00:09:08,160 --> 00:09:11,319 Speaker 1: the balance sheet for, they can just push that cash 157 00:09:11,320 --> 00:09:14,160 Speaker 1: away in the afternoon, you know, and so that money 158 00:09:14,240 --> 00:09:16,640 Speaker 1: that that that comes in in the morning and swells 159 00:09:16,679 --> 00:09:19,080 Speaker 1: the bank's balance sheets to push it away into the 160 00:09:19,080 --> 00:09:21,359 Speaker 1: money funds and the money funds can taste it at 161 00:09:21,400 --> 00:09:24,320 Speaker 1: the reverse people facility. You know, this is a mechanism 162 00:09:24,760 --> 00:09:29,120 Speaker 1: that enables the system to kind of clear and and 163 00:09:29,200 --> 00:09:33,280 Speaker 1: get around the balance sheet bottlenecks. And you know, the 164 00:09:33,320 --> 00:09:36,520 Speaker 1: reverse triple facility has no limits. I mean, it's eighty 165 00:09:36,559 --> 00:09:39,000 Speaker 1: billion dollars per counter party. We are, you know, some 166 00:09:39,080 --> 00:09:42,079 Speaker 1: distance away still from some some accounts maxing out the 167 00:09:42,240 --> 00:09:44,479 Speaker 1: kind of party limit, but you know, the set indicated 168 00:09:44,520 --> 00:09:47,000 Speaker 1: that they can base the kind of party cap to 169 00:09:47,000 --> 00:09:50,959 Speaker 1: to a much higher number. So so really there's there's 170 00:09:51,040 --> 00:09:54,679 Speaker 1: there's no limits to you know, this system is well designed, 171 00:09:54,679 --> 00:09:57,000 Speaker 1: it's well built, it's working, and it's doing what it's 172 00:09:57,000 --> 00:10:00,439 Speaker 1: supposed to do. And frankly, I think, you know, all 173 00:10:00,480 --> 00:10:02,920 Speaker 1: this money that's going into money funds and ultimately it 174 00:10:03,000 --> 00:10:06,520 Speaker 1: is getting deployed in the in the reverse report facility, 175 00:10:06,720 --> 00:10:09,160 Speaker 1: you want to think about it two ways. You know, 176 00:10:09,200 --> 00:10:13,240 Speaker 1: there's two things happening. Number one, we have massive bill 177 00:10:13,280 --> 00:10:16,800 Speaker 1: paidowns that are happening at the moment, because that's something 178 00:10:17,280 --> 00:10:20,720 Speaker 1: to talk about. But you know, there's these bill paidowns 179 00:10:20,840 --> 00:10:24,400 Speaker 1: and so money funds are losing the current asset that 180 00:10:24,440 --> 00:10:26,760 Speaker 1: they have in their existing book of business and then 181 00:10:26,840 --> 00:10:29,600 Speaker 1: they have cash coming and then they need to places 182 00:10:29,679 --> 00:10:31,920 Speaker 1: somewhere else. And that's the RRP facilities. So that's just 183 00:10:31,960 --> 00:10:36,480 Speaker 1: a rotation within within these money fund portfolios. The other 184 00:10:36,800 --> 00:10:39,240 Speaker 1: is new money that into the money funds, and that 185 00:10:39,360 --> 00:10:42,280 Speaker 1: new money is the money that the large banks are 186 00:10:42,440 --> 00:10:45,400 Speaker 1: are pushing away because they don't have the balance sheet 187 00:10:45,400 --> 00:10:49,800 Speaker 1: for them. And so there is something very very interesting happen, 188 00:10:50,000 --> 00:10:52,800 Speaker 1: which is which is that at any given point in time, 189 00:10:52,800 --> 00:10:56,840 Speaker 1: when the bank gets a new deposits, especially under COVID, 190 00:10:57,440 --> 00:11:01,960 Speaker 1: it's either a new deposit because there is q WE happening. 191 00:11:02,040 --> 00:11:04,599 Speaker 1: And it's how you know, when q WE have, the 192 00:11:04,679 --> 00:11:07,000 Speaker 1: pasites get created in the banking system, but those are 193 00:11:07,040 --> 00:11:12,200 Speaker 1: low quality deposits, become institutions sold a bond to the 194 00:11:12,240 --> 00:11:15,440 Speaker 1: Fed and got that institutional hot money that doesn't really 195 00:11:15,480 --> 00:11:17,520 Speaker 1: have a lot of value from the perspective of the bank. 196 00:11:17,960 --> 00:11:20,600 Speaker 1: So the banks are pushing that stuff away. And then 197 00:11:20,640 --> 00:11:24,120 Speaker 1: there's also still a lot of stimulus happening, you know, 198 00:11:24,160 --> 00:11:27,320 Speaker 1: unemployment insurance text you're going out, we have COVID payments, 199 00:11:27,360 --> 00:11:30,559 Speaker 1: we have all sorts of payments that the government is 200 00:11:30,559 --> 00:11:34,040 Speaker 1: still making to the households. Those are the good deposits. 201 00:11:34,080 --> 00:11:37,760 Speaker 1: So if you have a banking system that is balance constrained, 202 00:11:37,760 --> 00:11:40,640 Speaker 1: then the largest banks are balancing extreme in the US. 203 00:11:41,160 --> 00:11:43,439 Speaker 1: You know, this is also a mechanism that enables these 204 00:11:43,480 --> 00:11:46,480 Speaker 1: banks to take all these deposits as they are coming 205 00:11:46,520 --> 00:11:48,720 Speaker 1: in and then at the end of the day make 206 00:11:48,760 --> 00:11:51,160 Speaker 1: a choice as to this is good quality, this is 207 00:11:51,200 --> 00:11:53,480 Speaker 1: bath quality. So the good quality I want to make 208 00:11:53,559 --> 00:11:55,840 Speaker 1: room for him at Talantreet and I want to retain it. 209 00:11:56,320 --> 00:11:58,760 Speaker 1: And it's bad stuff. I just want to push away 210 00:11:58,840 --> 00:12:01,760 Speaker 1: into the money fund because it's absolutely no value from 211 00:12:01,840 --> 00:12:05,600 Speaker 1: from from a liquidity perspective, and so it's actually a 212 00:12:05,600 --> 00:12:09,200 Speaker 1: facility that helps the banks to cherry pick of the 213 00:12:09,240 --> 00:12:13,160 Speaker 1: posits they want old and so it works, it works, 214 00:12:13,320 --> 00:12:15,920 Speaker 1: and you know, you know, we often think about the 215 00:12:16,040 --> 00:12:20,520 Speaker 1: RP facility as the floor underpinning the basement of money 216 00:12:20,520 --> 00:12:22,280 Speaker 1: market trades, and it's and it's a floor to money 217 00:12:22,280 --> 00:12:25,680 Speaker 1: market trads too, So I think it's big, but it's 218 00:12:25,720 --> 00:12:29,280 Speaker 1: doing as it's supposed to do. And frankly, absolutely no 219 00:12:29,440 --> 00:12:32,560 Speaker 1: difference between you know, treasuries cash banans being at one 220 00:12:32,600 --> 00:12:35,120 Speaker 1: and a half Julian or the reverse reposacility being at 221 00:12:35,160 --> 00:12:37,560 Speaker 1: one and a half Julian. It's it's the same thing. 222 00:12:37,679 --> 00:12:40,880 Speaker 1: It's just there's a different mechanisms through which the system 223 00:12:41,040 --> 00:13:02,520 Speaker 1: was it So if the reverse were facility is successful 224 00:13:02,760 --> 00:13:04,920 Speaker 1: in the sense that you know, it's setting the floor 225 00:13:05,080 --> 00:13:08,680 Speaker 1: on interest rates um and it's soaking up this excess 226 00:13:08,800 --> 00:13:12,400 Speaker 1: on liquidity in the system. Why did the FED fuel 227 00:13:12,440 --> 00:13:16,200 Speaker 1: the need to start paying interest on it? So you know, 228 00:13:16,400 --> 00:13:19,439 Speaker 1: interest used to be zero and then in June the 229 00:13:19,480 --> 00:13:23,000 Speaker 1: FED raised it to five basis points. And here I 230 00:13:23,000 --> 00:13:25,679 Speaker 1: think I should note that this is actually a call 231 00:13:25,840 --> 00:13:29,080 Speaker 1: that you got wrong, right, you You weren't expecting them 232 00:13:29,440 --> 00:13:32,400 Speaker 1: to raise that interest. So what's going on there? And 233 00:13:32,440 --> 00:13:34,880 Speaker 1: what's your take on that? Yes, that that's that's a call. 234 00:13:35,120 --> 00:13:37,880 Speaker 1: That's a call I get wrong. Look, I think I 235 00:13:37,920 --> 00:13:42,760 Speaker 1: would say it's an extreme aversion to negative interest rates 236 00:13:42,800 --> 00:13:46,920 Speaker 1: in the us UM which I basically which I basically misread. 237 00:13:47,160 --> 00:13:50,520 Speaker 1: You know, the interest on the reverse people was raised 238 00:13:50,640 --> 00:13:54,480 Speaker 1: to five basis points because I mean, look, the backdrop 239 00:13:54,559 --> 00:13:56,480 Speaker 1: part this is, you know, if you're the FED, you 240 00:13:56,559 --> 00:13:58,880 Speaker 1: have two groups talked to all the time, the banks 241 00:13:58,880 --> 00:14:01,920 Speaker 1: and the money fund The banks are telling you I 242 00:14:01,960 --> 00:14:04,400 Speaker 1: can't take any more to passes because I'm cool. You know, 243 00:14:04,440 --> 00:14:06,840 Speaker 1: I have an SLR and I have an SLAR constrained. 244 00:14:06,920 --> 00:14:09,600 Speaker 1: You know, the reserves haven't been exempted from the SAR. 245 00:14:09,840 --> 00:14:12,400 Speaker 1: I'm not going to take the money funds are telling 246 00:14:12,400 --> 00:14:13,880 Speaker 1: you what. I'm not going to take the money either, 247 00:14:13,960 --> 00:14:18,560 Speaker 1: because you know the rps are zero. I have certain 248 00:14:18,600 --> 00:14:22,040 Speaker 1: fixed costs, variable costs that are a function on my 249 00:14:22,080 --> 00:14:25,440 Speaker 1: assets under management. So I need to be able to 250 00:14:25,480 --> 00:14:28,120 Speaker 1: make a buck, you know, if I take new money. 251 00:14:28,640 --> 00:14:32,400 Speaker 1: You know, my my argument was basically, you can money 252 00:14:32,400 --> 00:14:36,400 Speaker 1: fund could ultimately charge charge the end investors a fee 253 00:14:36,640 --> 00:14:39,920 Speaker 1: for or for taking their money. I think it would 254 00:14:39,960 --> 00:14:42,880 Speaker 1: be the end of the world. Um, because at the 255 00:14:42,960 --> 00:14:45,960 Speaker 1: end of the day, the FET cares about the constellation 256 00:14:46,000 --> 00:14:48,880 Speaker 1: of the administered of the of the of the overnight 257 00:14:48,960 --> 00:14:51,120 Speaker 1: rates that it's looking at, which are all inter bank grates. 258 00:14:51,200 --> 00:14:55,160 Speaker 1: You know, FET funds, euro dollars, soper repo, all that stuff. 259 00:14:55,720 --> 00:14:58,240 Speaker 1: But you know, the FET shouldn't really care about the 260 00:14:58,360 --> 00:15:02,640 Speaker 1: rate two end investors. Right, there's a big difference between 261 00:15:02,720 --> 00:15:05,960 Speaker 1: rates to end investors and inter bank rates. Because that 262 00:15:06,080 --> 00:15:09,920 Speaker 1: was my prior and so, as you said, I was wrong. 263 00:15:10,000 --> 00:15:13,080 Speaker 1: But what did we learned from this from this episode 264 00:15:13,080 --> 00:15:15,240 Speaker 1: of being wrong. I think what we've learned is that, 265 00:15:15,640 --> 00:15:17,680 Speaker 1: you know, the FED care is not only about these 266 00:15:18,160 --> 00:15:22,840 Speaker 1: inter bank rates, but the FED also cares about rates 267 00:15:22,840 --> 00:15:26,960 Speaker 1: to end investors. They are averse to even bill yields 268 00:15:27,000 --> 00:15:30,360 Speaker 1: going negative in episodes other than a master prisis you 269 00:15:30,400 --> 00:15:33,480 Speaker 1: know last March. They don't want money fund fields to 270 00:15:33,480 --> 00:15:36,360 Speaker 1: be negative. They don't want the positive rates in the 271 00:15:36,400 --> 00:15:39,120 Speaker 1: banking system to be to be negative. So so they 272 00:15:39,160 --> 00:15:42,640 Speaker 1: basically just raised the r a period to five basis points. 273 00:15:42,680 --> 00:15:45,800 Speaker 1: I think the money funds got an asset that is 274 00:15:45,840 --> 00:15:50,560 Speaker 1: sufficient for them to which yields enough for them to 275 00:15:50,600 --> 00:15:53,640 Speaker 1: be able to cover their costs to even charge the 276 00:15:53,720 --> 00:15:56,200 Speaker 1: feed to investors, and for the end investors to end 277 00:15:56,280 --> 00:15:58,640 Speaker 1: up with with a with a with a positive field. 278 00:15:58,640 --> 00:16:00,960 Speaker 1: So I think I think the you know, the short 279 00:16:01,000 --> 00:16:04,560 Speaker 1: answer is there's that extreme aversion the negative. It's just 280 00:16:04,600 --> 00:16:07,920 Speaker 1: something beyond the the US. I'm kind of amused that 281 00:16:08,000 --> 00:16:12,080 Speaker 1: so many people complain about the FED manipulating interest rates 282 00:16:12,080 --> 00:16:16,960 Speaker 1: and meanwhile the FED is concerned about private actors manipulating 283 00:16:17,000 --> 00:16:21,040 Speaker 1: interest rates downwards to a to a negative level. So 284 00:16:21,240 --> 00:16:23,400 Speaker 1: one of the reasons Joe and I love having you 285 00:16:23,480 --> 00:16:26,640 Speaker 1: on the show Resultan is because you do this research 286 00:16:26,760 --> 00:16:30,920 Speaker 1: that is incredibly granular, where you talk about, you know, 287 00:16:31,120 --> 00:16:35,120 Speaker 1: the individual incentives for each bank, why they do the 288 00:16:35,120 --> 00:16:37,560 Speaker 1: things that they do. You just touch on it, you know, 289 00:16:37,600 --> 00:16:39,720 Speaker 1: with the Federal Reserve, the idea that the FED is 290 00:16:39,760 --> 00:16:45,720 Speaker 1: absolutely loath to have negative rates in the headlines basically, Um, 291 00:16:45,760 --> 00:16:50,720 Speaker 1: can you walk us through exactly how banks are thinking 292 00:16:51,040 --> 00:16:56,040 Speaker 1: about various forms of cash like instruments at the moment. 293 00:16:56,120 --> 00:16:58,120 Speaker 1: So you know, when we say the system is a 294 00:16:58,160 --> 00:17:04,000 Speaker 1: washing liquidity, that liquidity kind of comes in different formats. 295 00:17:04,000 --> 00:17:06,040 Speaker 1: So you know, you can have US treasuries, you can 296 00:17:06,080 --> 00:17:10,040 Speaker 1: have agency nbs, um, you can have excess reserves that 297 00:17:10,359 --> 00:17:13,840 Speaker 1: banks get from the FED. And I'm wondering, like, how 298 00:17:14,440 --> 00:17:20,960 Speaker 1: are banks thinking about that mix at the moment. Well, Um, 299 00:17:21,000 --> 00:17:24,240 Speaker 1: it's a it's it's it's a simple it's a simple answer. 300 00:17:25,280 --> 00:17:28,359 Speaker 1: At various points over the past five years. You know, 301 00:17:28,440 --> 00:17:33,400 Speaker 1: these liquidity portfolios are always are always being up. So 302 00:17:33,640 --> 00:17:36,480 Speaker 1: you know, whatever is the yield st that's that's what 303 00:17:36,600 --> 00:17:40,439 Speaker 1: the banks do with that liquidity. Look. Uh, sometimes you 304 00:17:40,480 --> 00:17:43,159 Speaker 1: know they lend into the reple market because it feels 305 00:17:43,200 --> 00:17:46,920 Speaker 1: better than underserves at the FED. Interest on reserves is 306 00:17:46,960 --> 00:17:50,880 Speaker 1: always there is the starting point, of course. Uh. Sometimes 307 00:17:50,880 --> 00:17:53,639 Speaker 1: you lend in the f X spot market because yields 308 00:17:53,640 --> 00:17:57,920 Speaker 1: are much better there. And in both of these cases, 309 00:17:58,040 --> 00:18:01,400 Speaker 1: you know, the opportunity set is pretty it's pretty bad. 310 00:18:01,480 --> 00:18:03,440 Speaker 1: I mean, you know REPO is well below I O 311 00:18:03,640 --> 00:18:06,560 Speaker 1: or as I said, you know, the relative value you 312 00:18:06,600 --> 00:18:09,040 Speaker 1: hedge from community. It's kind of checked out at the 313 00:18:09,040 --> 00:18:11,399 Speaker 1: moment because there's there's not a lot of you know, 314 00:18:11,480 --> 00:18:15,080 Speaker 1: bond basis opportunities um to to to put on and 315 00:18:15,119 --> 00:18:17,760 Speaker 1: to the funds. So so the report market is is 316 00:18:17,920 --> 00:18:21,160 Speaker 1: very quiet. The fx pop market. Similarly, when you look 317 00:18:21,200 --> 00:18:23,679 Speaker 1: at you know, the the very front and points in 318 00:18:23,720 --> 00:18:25,800 Speaker 1: the fx S pop market for these tanks are active 319 00:18:26,720 --> 00:18:30,359 Speaker 1: tom next spot next points implied yields are just the 320 00:18:30,400 --> 00:18:33,640 Speaker 1: basis point above io. We are, I mean, we've never 321 00:18:33,680 --> 00:18:36,960 Speaker 1: seen things this tide since pots of peoples rolled out. 322 00:18:37,000 --> 00:18:40,119 Speaker 1: So this is this is uh, this is again what 323 00:18:40,320 --> 00:18:43,440 Speaker 1: we started the conversation with. It's too much, too much security, 324 00:18:43,560 --> 00:18:46,919 Speaker 1: not a demand for this cash. Sometimes, you know, the 325 00:18:46,920 --> 00:18:49,360 Speaker 1: fx S pop market and the report market will also 326 00:18:49,600 --> 00:18:52,000 Speaker 1: each other and so the fex pop market can pull 327 00:18:52,040 --> 00:18:55,879 Speaker 1: the report rates up. But so money markets again or doormant. 328 00:18:55,880 --> 00:18:58,680 Speaker 1: So if you're a bank portfolio, you cannot truly do 329 00:18:58,760 --> 00:19:02,440 Speaker 1: anything but go out and when you go out the curve, 330 00:19:02,520 --> 00:19:04,720 Speaker 1: you will be looking at other age curity, which is 331 00:19:04,920 --> 00:19:08,439 Speaker 1: which is mortgages, mortgages and treasuries, and then you know 332 00:19:08,480 --> 00:19:10,600 Speaker 1: you can you can buy these treasuries which offer a 333 00:19:10,640 --> 00:19:13,880 Speaker 1: spread over row I s or can buy it out right, 334 00:19:14,000 --> 00:19:15,840 Speaker 1: you can buy it, buy it an asset spot. But 335 00:19:15,880 --> 00:19:20,680 Speaker 1: basically treasury securities are the frontier. And when you look 336 00:19:20,720 --> 00:19:23,480 Speaker 1: at when you look at the bank h portfolios, you 337 00:19:23,560 --> 00:19:26,120 Speaker 1: will you will see that you know, they have they 338 00:19:26,160 --> 00:19:30,960 Speaker 1: have added a lot of treasury securities under the pandemic. 339 00:19:31,160 --> 00:19:34,040 Speaker 1: And so you know, good for you as government because 340 00:19:34,160 --> 00:19:35,800 Speaker 1: they have a lot of paper that they that they 341 00:19:35,840 --> 00:19:39,119 Speaker 1: need to issue. But that's basically where the money is 342 00:19:39,160 --> 00:19:42,160 Speaker 1: going at the at the moment. I think I think 343 00:19:42,160 --> 00:19:44,600 Speaker 1: it would also be interesting to kind of dig into, 344 00:19:45,000 --> 00:19:47,879 Speaker 1: you know, some bank by bank examples of ending in 345 00:19:47,920 --> 00:19:51,800 Speaker 1: this department, because you know, when we talk about banks, 346 00:19:52,160 --> 00:19:55,000 Speaker 1: it sounds like it's plural, right, because there's a lot 347 00:19:55,000 --> 00:19:57,840 Speaker 1: of banks. But actually what's happening is that there's only 348 00:19:58,480 --> 00:20:01,280 Speaker 1: two banks really that have done all the heavy lifting 349 00:20:01,280 --> 00:20:03,920 Speaker 1: in terms of in terms of buying all these treasuries, 350 00:20:03,960 --> 00:20:07,560 Speaker 1: and and that those two banks are Hip Morgan and 351 00:20:07,600 --> 00:20:10,280 Speaker 1: Bank of America. These are these are two of the 352 00:20:10,320 --> 00:20:13,600 Speaker 1: most important creditors to the US government at the moment, 353 00:20:14,480 --> 00:20:16,760 Speaker 1: other than other than the set up of course, you know, 354 00:20:16,840 --> 00:20:19,440 Speaker 1: but but these are two banks that that approached their 355 00:20:19,600 --> 00:20:23,080 Speaker 1: their bond buying strategy completely differently. And you know what 356 00:20:23,119 --> 00:20:25,320 Speaker 1: I will say now is you know some of the 357 00:20:25,320 --> 00:20:27,680 Speaker 1: things that have been said at at these banks earnings 358 00:20:27,680 --> 00:20:31,639 Speaker 1: calls and so it's not not an inside d or 359 00:20:31,680 --> 00:20:35,320 Speaker 1: anything like that. You know, the Bank of America's management 360 00:20:35,560 --> 00:20:37,760 Speaker 1: has mentioned a number of times and they're on their 361 00:20:37,760 --> 00:20:40,800 Speaker 1: earnings calls that they are they are happy with the 362 00:20:40,840 --> 00:20:43,960 Speaker 1: fact that they have called the bottom in rates during 363 00:20:44,000 --> 00:20:47,320 Speaker 1: the third quarter of twenty twenty. They have been slowing 364 00:20:47,600 --> 00:20:52,800 Speaker 1: all their access security into into the mortgage markets ever since. 365 00:20:52,840 --> 00:20:56,600 Speaker 1: So they have this programmatic buying of treasury securities and 366 00:20:56,600 --> 00:21:00,399 Speaker 1: they are always in the market regardless of of abew. 367 00:21:00,480 --> 00:21:03,119 Speaker 1: That was simply because you know, that's a bank that 368 00:21:03,240 --> 00:21:06,840 Speaker 1: has that has a management philosophy where look, there is 369 00:21:06,880 --> 00:21:10,160 Speaker 1: no low demands, but these deposits keep coming in. So 370 00:21:10,280 --> 00:21:12,320 Speaker 1: we're a bank. So if the deposits are coming in 371 00:21:12,359 --> 00:21:14,359 Speaker 1: but there's no law demand, we have to do something 372 00:21:14,359 --> 00:21:17,120 Speaker 1: with this excess case. So we just you know, buy securities. 373 00:21:17,640 --> 00:21:21,560 Speaker 1: If households and corporations don't borrow, but the government does. 374 00:21:21,760 --> 00:21:24,919 Speaker 1: You know, we're just underprid that. JP Morgan is a 375 00:21:24,920 --> 00:21:27,879 Speaker 1: bit more different because they always have you know, strong 376 00:21:28,040 --> 00:21:32,560 Speaker 1: views about rates, and so Jamie Diamonds letter to shareholders 377 00:21:32,040 --> 00:21:36,359 Speaker 1: and he basically said, kilds are moving higher, elation is 378 00:21:36,400 --> 00:21:39,000 Speaker 1: coming that is going to have to chase down this 379 00:21:39,119 --> 00:21:41,080 Speaker 1: the patience. The yields are going higher, so we will 380 00:21:41,119 --> 00:21:44,439 Speaker 1: hold off on spending all the fact hundred billion dollars 381 00:21:44,440 --> 00:21:47,320 Speaker 1: of reserves that we have a FED until yield will higher. 382 00:21:48,040 --> 00:21:51,159 Speaker 1: And so you know they didn't spend any of this money. 383 00:21:51,840 --> 00:21:55,080 Speaker 1: Bank of America has been programmatic buying. I guess the 384 00:21:55,200 --> 00:22:00,080 Speaker 1: question from here going forward, is JP Morgan going to 385 00:22:00,240 --> 00:22:03,639 Speaker 1: adapt to a world where and this is this is 386 00:22:03,680 --> 00:22:06,520 Speaker 1: a good segue into into the standing people facility and 387 00:22:06,600 --> 00:22:09,040 Speaker 1: this idea of dealer of last resort. You know in 388 00:22:09,280 --> 00:22:10,880 Speaker 1: my writings and I think I mentioned this one it's 389 00:22:10,920 --> 00:22:14,800 Speaker 1: called too before. JP Morgan was always the lender of 390 00:22:14,920 --> 00:22:18,439 Speaker 1: next to last resorts of the system, right because before 391 00:22:18,480 --> 00:22:21,080 Speaker 1: the FED would stop in, you know, they had always 392 00:22:21,119 --> 00:22:23,040 Speaker 1: the most amount of reserves in the system. So whether 393 00:22:23,080 --> 00:22:25,200 Speaker 1: it was the FX swap market that was acting out 394 00:22:26,400 --> 00:22:28,879 Speaker 1: or the report market, you know, it was JP Morgan 395 00:22:29,000 --> 00:22:32,840 Speaker 1: lending into it. On the margin, there was value. There 396 00:22:32,920 --> 00:22:34,640 Speaker 1: was a lot of value in having all these sex 397 00:22:34,680 --> 00:22:38,680 Speaker 1: as cash because uh, you know, as Warren Buffett would say, 398 00:22:38,920 --> 00:22:41,399 Speaker 1: you know, cash has option value. So if you're a 399 00:22:41,440 --> 00:22:44,919 Speaker 1: bank portfolio, and especially if you're JP Morgan and your 400 00:22:44,920 --> 00:22:47,399 Speaker 1: heart of the financial system, you need to have that 401 00:22:47,480 --> 00:22:49,200 Speaker 1: cash to be able to kind of lend into these 402 00:22:49,200 --> 00:22:53,840 Speaker 1: money markets. Location right now, that opportunity that is extremely poor. 403 00:22:54,880 --> 00:22:57,440 Speaker 1: I mean, the only the only thing, the only thing 404 00:22:57,480 --> 00:23:00,200 Speaker 1: that gets people excited here and turned, which is which 405 00:23:00,240 --> 00:23:02,640 Speaker 1: is just pretty depressing by the way, so all year 406 00:23:02,680 --> 00:23:04,639 Speaker 1: there's nothing to do with the year in turn, you 407 00:23:04,680 --> 00:23:07,680 Speaker 1: have to kind of handicap that. But so that opportunity 408 00:23:07,880 --> 00:23:11,600 Speaker 1: is pool. Fields were supposed to go higher, but they didn't. 409 00:23:11,680 --> 00:23:14,919 Speaker 1: They went lower. You know, we have a taper announcement. 410 00:23:15,000 --> 00:23:17,120 Speaker 1: Fields didn't do anything on the back of that. So 411 00:23:17,600 --> 00:23:19,520 Speaker 1: I think it would be very interesting to see during 412 00:23:19,560 --> 00:23:23,000 Speaker 1: the second half of the year how this posture at 413 00:23:23,600 --> 00:23:27,280 Speaker 1: at this that this bank is going to change going forward, 414 00:23:27,280 --> 00:23:30,320 Speaker 1: because if Fields are not moving higher, they're basically giving 415 00:23:30,400 --> 00:23:32,840 Speaker 1: up a lot of net interest income that other banks 416 00:23:32,840 --> 00:23:36,600 Speaker 1: are earned. And so it was just very interesting. You know, 417 00:23:36,800 --> 00:23:40,520 Speaker 1: there there is this theory out there that bank demand 418 00:23:40,760 --> 00:23:45,760 Speaker 1: for treasuries to satisfy the liquidity requirements has been one 419 00:23:45,760 --> 00:23:48,800 Speaker 1: of the factors, you know, maybe even a very important 420 00:23:48,800 --> 00:23:53,159 Speaker 1: factor in keeping yields very low um And you know, 421 00:23:53,240 --> 00:23:56,280 Speaker 1: this was sort of a mystery in markets um over 422 00:23:56,320 --> 00:23:59,320 Speaker 1: the summer and in the spring, Why our treasury yields 423 00:23:59,320 --> 00:24:02,000 Speaker 1: so low when it looked like the US economy was 424 00:24:02,000 --> 00:24:05,680 Speaker 1: actually recovering. How how big a factor do you think 425 00:24:05,840 --> 00:24:08,520 Speaker 1: bank demand has been when it comes to yields. It's 426 00:24:08,520 --> 00:24:10,239 Speaker 1: not it's not in the numbers. I mean, you just 427 00:24:10,280 --> 00:24:13,680 Speaker 1: don't see. You just don't see any kind of level 428 00:24:13,760 --> 00:24:18,600 Speaker 1: shift in in thanks buying more treasuries. So you know 429 00:24:18,880 --> 00:24:20,879 Speaker 1: they will have the cold reports out in a couple 430 00:24:20,880 --> 00:24:24,520 Speaker 1: of beeks, but but I doubt that there's anything increase 431 00:24:24,560 --> 00:24:26,800 Speaker 1: in bank buying because you noticed from the v P 432 00:24:26,920 --> 00:24:30,480 Speaker 1: a number. So you just just don't see any of that. 433 00:24:30,560 --> 00:24:32,879 Speaker 1: I mean, you know, the one thing I would point 434 00:24:32,960 --> 00:24:36,240 Speaker 1: to is, you know some of the there's two things. 435 00:24:36,280 --> 00:24:39,399 Speaker 1: You know that it's always about clothes and technical so 436 00:24:39,480 --> 00:24:42,080 Speaker 1: to speak. And then there is the narrative. I mean, 437 00:24:42,320 --> 00:24:44,280 Speaker 1: you know, the delta variant get a little out of hand, 438 00:24:44,640 --> 00:24:47,399 Speaker 1: and you know articles about that kind of started to 439 00:24:47,440 --> 00:24:52,879 Speaker 1: percolate proughly when when yields have started to really, so 440 00:24:52,920 --> 00:24:55,400 Speaker 1: I think I think a lot of this is party 441 00:24:55,600 --> 00:24:59,280 Speaker 1: partlet of virus and the delta variant, but also t 442 00:24:59,440 --> 00:25:01,920 Speaker 1: g A moss were coming down, right, So so all 443 00:25:01,960 --> 00:25:05,280 Speaker 1: this cache was coming into the system, and when when 444 00:25:05,359 --> 00:25:08,040 Speaker 1: large amounts of money are coming into the system, there's 445 00:25:08,080 --> 00:25:11,600 Speaker 1: always some leakage because you know, people think about d 446 00:25:11,720 --> 00:25:13,960 Speaker 1: g A comes down, so there's fewer bills. All that 447 00:25:14,040 --> 00:25:16,760 Speaker 1: money goes to RP, yes, most of it, but some 448 00:25:16,840 --> 00:25:19,479 Speaker 1: of it leads and so someone who was in bills 449 00:25:19,600 --> 00:25:23,120 Speaker 1: probably went into an aggregant bond fund and that aggregant 450 00:25:23,119 --> 00:25:26,000 Speaker 1: bond fund had to kind of deployed that money coming in, 451 00:25:26,080 --> 00:25:28,640 Speaker 1: and so there was some bit for for fixed to come. 452 00:25:28,840 --> 00:25:31,960 Speaker 1: So so I think I think it's a combination of 453 00:25:32,000 --> 00:25:35,240 Speaker 1: those two. But it's definitely not been the bank portfolios 454 00:25:35,320 --> 00:25:39,320 Speaker 1: that that caused that caused the really it was certainly 455 00:25:39,359 --> 00:25:42,240 Speaker 1: not uh JP Morgan because they were kind of waiting 456 00:25:42,280 --> 00:25:44,320 Speaker 1: for the others the other things to happen, you know. 457 00:25:44,400 --> 00:25:49,040 Speaker 1: So Okay, well, um let's talk about the standing repo 458 00:25:49,200 --> 00:25:52,280 Speaker 1: facility then. Um, you know, when the FED announced that 459 00:25:52,480 --> 00:25:56,920 Speaker 1: there were a lot of different interpretations over what exactly 460 00:25:57,040 --> 00:25:59,359 Speaker 1: it's meant to be doing so. You know, on the 461 00:25:59,400 --> 00:26:02,639 Speaker 1: one hand, some people were saying it's supposed to prevent 462 00:26:02,720 --> 00:26:05,680 Speaker 1: more blow ups in the repo market. Um. But then 463 00:26:05,720 --> 00:26:08,160 Speaker 1: there were some other people who were saying, it's basically 464 00:26:08,280 --> 00:26:11,240 Speaker 1: paving the way for the end of QUEI and allowing 465 00:26:11,400 --> 00:26:14,560 Speaker 1: the FED to start the taper. So how are you 466 00:26:14,640 --> 00:26:20,359 Speaker 1: viewing it? Yes, so, so the latter one was, you know, 467 00:26:20,359 --> 00:26:23,440 Speaker 1: the view that I that I subscribed to as well, Look, 468 00:26:23,680 --> 00:26:27,520 Speaker 1: we don't need a standing repo now there's so much 469 00:26:27,520 --> 00:26:29,840 Speaker 1: money in the system that we won't need it for 470 00:26:29,880 --> 00:26:34,680 Speaker 1: the next five years in in the aggregate sense, you know. Um, 471 00:26:34,800 --> 00:26:40,040 Speaker 1: so the standing repo facility I think it's going to 472 00:26:40,119 --> 00:26:43,600 Speaker 1: be I would say, we are see the impact. I mean, 473 00:26:43,720 --> 00:26:47,080 Speaker 1: you have to standing people. There's one for three actually, 474 00:26:47,119 --> 00:26:49,040 Speaker 1: if you want to think about its actually one is 475 00:26:49,080 --> 00:26:55,760 Speaker 1: there for the dealers that should be able to replace funding. 476 00:26:55,800 --> 00:27:01,760 Speaker 1: They need to mediate um between the and the cash providers. 477 00:27:02,280 --> 00:27:04,440 Speaker 1: The cash providers blow away from the dealers that is 478 00:27:04,480 --> 00:27:06,760 Speaker 1: going to step in and so the dealers to find 479 00:27:07,520 --> 00:27:10,800 Speaker 1: standing repurposes just the term. But again I tend to 480 00:27:10,800 --> 00:27:14,080 Speaker 1: think about these in terms of types events that have accessed. 481 00:27:14,119 --> 00:27:16,440 Speaker 1: So there's the dealers then there will be the bank 482 00:27:16,480 --> 00:27:20,879 Speaker 1: port folios large and small that can that cannot buy. 483 00:27:21,000 --> 00:27:23,280 Speaker 1: And then you have the FEMA report facility, which is 484 00:27:23,440 --> 00:27:26,600 Speaker 1: which is the same for for foreign central backs. So 485 00:27:26,640 --> 00:27:30,080 Speaker 1: that's that's that's one one BA gold block, so to speak. 486 00:27:30,400 --> 00:27:32,399 Speaker 1: I also want to say the same day that the 487 00:27:32,440 --> 00:27:36,359 Speaker 1: SET announced sending report facility, the G thirty also issued 488 00:27:36,400 --> 00:27:39,879 Speaker 1: a report, part of which was basically recommending that we 489 00:27:39,960 --> 00:27:42,159 Speaker 1: also need a standing group of but we need to 490 00:27:42,200 --> 00:27:48,159 Speaker 1: make this available to anyone who owns treasury collateral. And 491 00:27:48,240 --> 00:27:51,000 Speaker 1: so there was always these two views about who should 492 00:27:51,080 --> 00:27:53,800 Speaker 1: we make who should get access to the standing group, 493 00:27:54,480 --> 00:27:57,240 Speaker 1: and so I always thought, you know, the the the 494 00:27:57,320 --> 00:28:02,679 Speaker 1: issue with opening up for everyone is that, you know, 495 00:28:02,760 --> 00:28:05,120 Speaker 1: it's just it's just a very broad system, right so 496 00:28:05,720 --> 00:28:07,760 Speaker 1: you know, if it's hedge funds to how do you 497 00:28:07,840 --> 00:28:10,679 Speaker 1: draw the line you're letting the little ones and the 498 00:28:10,720 --> 00:28:14,080 Speaker 1: big ones. If it's asset managers, again, how do you 499 00:28:14,160 --> 00:28:18,360 Speaker 1: how do you design the criteria for access and haircuts 500 00:28:18,359 --> 00:28:21,399 Speaker 1: and whatnot, and so so that's cumbersome. Then if you 501 00:28:21,520 --> 00:28:24,600 Speaker 1: think about what the FET did, it's actually it's actually 502 00:28:24,640 --> 00:28:28,480 Speaker 1: a beautiful middle ground because you know the dealers, of 503 00:28:28,480 --> 00:28:34,040 Speaker 1: course they always deal with bank portfolios and foreign central bx. 504 00:28:34,560 --> 00:28:37,280 Speaker 1: What are they? I mean, they are half the by side. 505 00:28:38,320 --> 00:28:39,880 Speaker 1: You know, if you think about the by side from 506 00:28:39,880 --> 00:28:42,840 Speaker 1: the dealer's perspective, you know, it's the insurance companies, it's 507 00:28:42,880 --> 00:28:46,200 Speaker 1: the asset managers, the hedge funds, and the bank portfolio 508 00:28:46,440 --> 00:28:51,400 Speaker 1: and the foreign central banks. So basically two very important actors. 509 00:28:51,440 --> 00:28:53,880 Speaker 1: From from the bias, I've got access to the sustanding 510 00:28:53,880 --> 00:28:57,840 Speaker 1: pople facility, which means that in the next crisis, and 511 00:28:57,920 --> 00:29:00,520 Speaker 1: there will be an ex crisis because there's always are 512 00:29:00,760 --> 00:29:03,240 Speaker 1: that there always are you know, they will be able 513 00:29:03,280 --> 00:29:08,600 Speaker 1: to go to the FED to turn bonds into into liquidity, 514 00:29:08,760 --> 00:29:11,040 Speaker 1: whether you're a foreign center bank or a banquet bo 515 00:29:11,120 --> 00:29:13,360 Speaker 1: you and that's going to be a massive help for 516 00:29:13,480 --> 00:29:16,400 Speaker 1: everyone else in the system because the dealers won't have 517 00:29:16,480 --> 00:29:18,960 Speaker 1: to deal with these accounts because they can go to 518 00:29:19,040 --> 00:29:21,320 Speaker 1: the FED directly, and so everybody else is going to 519 00:29:21,360 --> 00:29:25,400 Speaker 1: have more more balance sheet that um that the dealers 520 00:29:25,440 --> 00:29:27,880 Speaker 1: can that the dealers can provide to them. So this 521 00:29:28,000 --> 00:29:30,920 Speaker 1: is this is how the countours of the next basis 522 00:29:31,640 --> 00:29:36,080 Speaker 1: is going to play out. Observation number one, Observation number two. 523 00:29:37,040 --> 00:29:40,640 Speaker 1: You know why now look I think, I think anyone 524 00:29:41,080 --> 00:29:44,160 Speaker 1: anyone that has because you're a foreign central bank, now 525 00:29:44,240 --> 00:29:49,760 Speaker 1: you need sixty billion dollars less in liquidity because you 526 00:29:49,760 --> 00:29:52,640 Speaker 1: know that the FED will give it to you. So 527 00:29:52,720 --> 00:29:55,040 Speaker 1: if you if you if you think about the typical 528 00:29:55,040 --> 00:30:00,000 Speaker 1: effects manager, it has some liquid assets in money markets, 529 00:30:00,000 --> 00:30:04,240 Speaker 1: has some longer term securities and treasuries of mortgage. That 530 00:30:04,480 --> 00:30:07,080 Speaker 1: that money market did is basically, you know, you just 531 00:30:07,160 --> 00:30:10,240 Speaker 1: leave money on the table because that's your liquidity insurance. 532 00:30:10,520 --> 00:30:12,680 Speaker 1: That's the money that you can spend on short order 533 00:30:12,680 --> 00:30:16,960 Speaker 1: if something unexpected happen. You can now allocate sixty billion 534 00:30:17,120 --> 00:30:21,360 Speaker 1: less UH to those types of instruments because if and 535 00:30:21,440 --> 00:30:25,120 Speaker 1: when that licurity event, the feed is going to be 536 00:30:25,160 --> 00:30:27,960 Speaker 1: able to provide to you that acurity on demand for 537 00:30:28,000 --> 00:30:31,040 Speaker 1: a fixed price. Then you know, these liquidity events always 538 00:30:31,120 --> 00:30:33,000 Speaker 1: less like a week or two weeks or a month 539 00:30:33,080 --> 00:30:36,640 Speaker 1: maybe at most, and then the flows changed. But you know, 540 00:30:36,760 --> 00:30:39,240 Speaker 1: it's a it's a nice it's a nice tool to have, 541 00:30:40,160 --> 00:30:41,840 Speaker 1: and you can also know that you know the fet 542 00:30:41,920 --> 00:30:44,560 Speaker 1: is not going to be opportunistic. You know, if not, 543 00:30:44,680 --> 00:30:47,160 Speaker 1: it might not be the case if you if you 544 00:30:47,200 --> 00:30:49,320 Speaker 1: want to raise the petulity in the market because you 545 00:30:49,400 --> 00:30:53,680 Speaker 1: will be with dealers. Dealers can charge your price. If 546 00:30:53,680 --> 00:30:56,000 Speaker 1: you're doing this, the world can get out. You know, 547 00:30:56,200 --> 00:30:58,600 Speaker 1: it's it's it's not supposed to, but you know people 548 00:30:58,600 --> 00:31:02,200 Speaker 1: always started like calls on accounts read one account is selling. 549 00:31:02,680 --> 00:31:04,320 Speaker 1: I would I would also say that you know, this 550 00:31:04,720 --> 00:31:07,440 Speaker 1: report facility, even though it's going to be more expensive 551 00:31:07,480 --> 00:31:09,880 Speaker 1: than the market, because it's priced a little bit wider 552 00:31:09,880 --> 00:31:12,959 Speaker 1: than the market design, there will be an an an 553 00:31:12,960 --> 00:31:17,360 Speaker 1: limited premium that foreign central banks are are willing to 554 00:31:17,400 --> 00:31:20,360 Speaker 1: pay up for because because they can just raise their 555 00:31:20,840 --> 00:31:23,760 Speaker 1: these they're really anonymous thing. You know, if you remember 556 00:31:23,880 --> 00:31:28,680 Speaker 1: China selling uh you know back sixteen all those treasuries 557 00:31:28,680 --> 00:31:32,760 Speaker 1: and cause some backuping dealer in the increason what threads around. 558 00:31:33,240 --> 00:31:36,680 Speaker 1: I would even say that those episodes probably are going 559 00:31:36,720 --> 00:31:39,080 Speaker 1: to be less painful going forward because you just go 560 00:31:39,160 --> 00:31:42,120 Speaker 1: to the FED and so instead of selling those treasuries 561 00:31:42,200 --> 00:31:45,280 Speaker 1: into spine and stand, get those dollars to your interventions 562 00:31:45,280 --> 00:31:48,240 Speaker 1: in the in the in the in the local currency market. 563 00:31:48,320 --> 00:31:50,640 Speaker 1: So so I think this is this is going to 564 00:31:50,680 --> 00:31:54,280 Speaker 1: smooth things. I would also say since the standing report 565 00:31:54,320 --> 00:31:58,160 Speaker 1: facility was announced, we've had a ten year auction and 566 00:31:58,200 --> 00:32:01,640 Speaker 1: a five year auction that has gone extremely you know, 567 00:32:01,720 --> 00:32:04,560 Speaker 1: well especially the ten uere auction, and we've seen a 568 00:32:04,640 --> 00:32:08,920 Speaker 1: foreign participation at those and at those auctions so which 569 00:32:08,960 --> 00:32:12,600 Speaker 1: was a record participation by foreign official accounts. So so 570 00:32:12,640 --> 00:32:15,800 Speaker 1: I think here's a liquidity tool, and the foreign center 571 00:32:15,880 --> 00:32:18,840 Speaker 1: banks are saying thank you, and they are are underwriting 572 00:32:19,400 --> 00:32:21,840 Speaker 1: the deficits the resultant. You know, if you think about 573 00:32:22,160 --> 00:32:27,520 Speaker 1: five large central banks each allocating sixty billion dollars experts treasuries, 574 00:32:27,600 --> 00:32:30,360 Speaker 1: that's that's three hundred billion dollars, don't know, half a 575 00:32:30,400 --> 00:32:33,840 Speaker 1: taper or something like that. So you know, foreign central banks, 576 00:32:33,880 --> 00:32:37,800 Speaker 1: I think over time they will change their behavior all 577 00:32:37,880 --> 00:32:41,080 Speaker 1: the little less security and lend a little longer to 578 00:32:41,120 --> 00:32:43,440 Speaker 1: the US government because the other arm of the U. 579 00:32:43,560 --> 00:32:46,440 Speaker 1: S Government is going to fund their liquidity. So that's 580 00:32:46,440 --> 00:32:50,240 Speaker 1: that's fun. The bank portfolios to be able to apply 581 00:32:50,360 --> 00:32:54,680 Speaker 1: starting at piver one for for access to this facility, 582 00:32:54,920 --> 00:32:58,400 Speaker 1: and you know, the bank portfolios, I think, I think 583 00:32:58,480 --> 00:33:01,240 Speaker 1: this is not going to be as big a deal 584 00:33:01,360 --> 00:33:04,800 Speaker 1: for for the big banks like Japer, Morgan and Bank 585 00:33:04,880 --> 00:33:08,400 Speaker 1: of America because because they are they are a league 586 00:33:08,440 --> 00:33:11,760 Speaker 1: of their own. But you know, there is twenty thirty 587 00:33:11,880 --> 00:33:15,200 Speaker 1: or so regional banks, smaller banks that also will qualify. 588 00:33:15,840 --> 00:33:18,680 Speaker 1: Then I think it's an overlooked fact that a lot 589 00:33:18,720 --> 00:33:22,760 Speaker 1: of these smaller banks also have a lot of access 590 00:33:22,800 --> 00:33:26,160 Speaker 1: reserves that they accumulated over the past years. Um. I 591 00:33:26,240 --> 00:33:28,800 Speaker 1: think I think that number. Um, I don't have it 592 00:33:29,080 --> 00:33:30,840 Speaker 1: on top of my head, but it's something like four 593 00:33:31,240 --> 00:33:34,760 Speaker 1: billion dollars. They can also spend some of these activity 594 00:33:35,000 --> 00:33:38,480 Speaker 1: on treasury securities and mortgages because they know that, you know, 595 00:33:38,760 --> 00:33:41,280 Speaker 1: the fat is there at twenty five pass points, Chances 596 00:33:41,360 --> 00:33:44,520 Speaker 1: are I will never need that activity, right, So if 597 00:33:44,560 --> 00:33:46,920 Speaker 1: there's a spread in buying treasuries, you should just you 598 00:33:46,960 --> 00:33:49,480 Speaker 1: should just do that. So so so I think this 599 00:33:49,680 --> 00:33:53,280 Speaker 1: is going to move the needle a lot, uh in 600 00:33:53,520 --> 00:33:58,960 Speaker 1: terms of making treasuries collateral in general, more attractive, more 601 00:33:59,040 --> 00:34:02,120 Speaker 1: attractive than cash, which is again if you look at 602 00:34:02,160 --> 00:34:05,479 Speaker 1: the side, guys, that's precisely that's precisely what you need. 603 00:34:05,640 --> 00:34:09,160 Speaker 1: This is this is generating demand. This is generating demand 604 00:34:09,239 --> 00:34:15,520 Speaker 1: for for for treasury securities from two very important buyers. Yeah, 605 00:34:15,600 --> 00:34:17,520 Speaker 1: this is something I wanted to ask you about because 606 00:34:17,640 --> 00:34:21,240 Speaker 1: there was this concern around who will actually buy treasury 607 00:34:21,280 --> 00:34:26,640 Speaker 1: securities and agency mbs. So you know, mortgage bonds issued 608 00:34:26,680 --> 00:34:29,560 Speaker 1: by the g s c s when the FED starts 609 00:34:29,640 --> 00:34:34,040 Speaker 1: to taper QUEI and you're suggesting that it's I guess 610 00:34:34,040 --> 00:34:37,160 Speaker 1: a non issue now because of the standing repot facility. 611 00:34:37,239 --> 00:34:40,200 Speaker 1: Is that right? Yes? I think this is a This 612 00:34:40,320 --> 00:34:44,000 Speaker 1: is the question of who will buy is a very 613 00:34:44,040 --> 00:34:47,880 Speaker 1: important question um in retrospect. Who buys on the margin. 614 00:34:48,880 --> 00:34:50,800 Speaker 1: It's it's always very simple, you know, like but in 615 00:34:50,920 --> 00:34:53,080 Speaker 1: real time and you need to figure out who's going 616 00:34:53,120 --> 00:34:56,840 Speaker 1: to buy in the next Uh. That's what people, you know, confused. 617 00:34:57,040 --> 00:34:59,719 Speaker 1: It's just kind of hard to be But look, if 618 00:35:00,040 --> 00:35:03,680 Speaker 1: we were to tell here's a brief history of of 619 00:35:03,840 --> 00:35:06,680 Speaker 1: rates and funding markets for the past five years, okay, 620 00:35:07,440 --> 00:35:09,280 Speaker 1: and it's you know, we always talked about the marginal 621 00:35:09,400 --> 00:35:13,000 Speaker 1: buyer in this program because you know, like life is 622 00:35:13,040 --> 00:35:16,120 Speaker 1: on the margin. Everything in market margin, So who's the 623 00:35:16,200 --> 00:35:22,880 Speaker 1: marginal buyer? Twenty to twenty seventeen, it was the Asian 624 00:35:22,920 --> 00:35:27,680 Speaker 1: fects hedged buyers that were extremely important and and we're closed. 625 00:35:27,880 --> 00:35:30,239 Speaker 1: So they were buying the treasuries they were sparking and 626 00:35:30,360 --> 00:35:33,960 Speaker 1: for dollars. Europeans were doing the same, and so that 627 00:35:34,200 --> 00:35:37,120 Speaker 1: that that they were the marginal buyers and then the 628 00:35:37,400 --> 00:35:39,920 Speaker 1: prose curency bass blew out and then they you know, 629 00:35:40,560 --> 00:35:44,280 Speaker 1: had their trial by fires there. Demand kind of changed 630 00:35:44,320 --> 00:35:46,359 Speaker 1: a little bit after that. Then you had a bond 631 00:35:46,400 --> 00:35:49,480 Speaker 1: basis that opened up. The set started to creates the 632 00:35:49,920 --> 00:35:52,719 Speaker 1: curve gradually platin so it's it was all the r 633 00:35:52,760 --> 00:35:56,160 Speaker 1: V hedge funds um and they funded everything in the 634 00:35:56,280 --> 00:36:00,320 Speaker 1: repo markets. And then we had that repo market episode 635 00:36:00,360 --> 00:36:05,320 Speaker 1: in September. The FEDS started to rebuild the liquidity buffer 636 00:36:05,560 --> 00:36:10,560 Speaker 1: of the system that build purchases and Lemic came and basically, 637 00:36:11,160 --> 00:36:13,799 Speaker 1: you know that was that was a moment where even 638 00:36:13,840 --> 00:36:15,880 Speaker 1: though you were building up the licurity buffer of the 639 00:36:15,960 --> 00:36:18,840 Speaker 1: system and you were going back to this access reserves regime, 640 00:36:19,520 --> 00:36:22,880 Speaker 1: you didn't do it fast enough, and the pandemic forced 641 00:36:22,920 --> 00:36:25,839 Speaker 1: your hand and basically the feed needed to take out 642 00:36:25,920 --> 00:36:27,560 Speaker 1: all the all the r V hedge funds from these 643 00:36:27,600 --> 00:36:31,840 Speaker 1: bond based positions because they couldn't fund fund these positions. 644 00:36:32,120 --> 00:36:35,320 Speaker 1: And then and then the bank portfolio stepped in and 645 00:36:35,480 --> 00:36:39,279 Speaker 1: they became the dominant buyers of treasury. So this is 646 00:36:39,360 --> 00:36:42,560 Speaker 1: the span of six years. You know, foreign fex hedge 647 00:36:42,600 --> 00:36:45,360 Speaker 1: to counts funding in the FEX bod market, relative value, 648 00:36:45,360 --> 00:36:49,879 Speaker 1: hedge funds funding in the report market. Um. And now 649 00:36:50,000 --> 00:36:54,480 Speaker 1: we have you know, the bank portfolios supported with a 650 00:36:54,560 --> 00:36:57,440 Speaker 1: standing report facility in case there is a need for it, 651 00:36:58,239 --> 00:37:00,719 Speaker 1: and so who is going to buy going forward? I 652 00:37:00,840 --> 00:37:03,719 Speaker 1: think I think the bank portfolios will be a very 653 00:37:03,800 --> 00:37:07,360 Speaker 1: important part of the picture because that's where the excess 654 00:37:07,440 --> 00:37:12,840 Speaker 1: cash is. We we just basically broadened and incentivized slightly 655 00:37:13,000 --> 00:37:16,320 Speaker 1: broader set of banks and foreign central banks to do 656 00:37:16,440 --> 00:37:19,080 Speaker 1: the same that that JP Morgan and Bank of America 657 00:37:19,160 --> 00:37:22,480 Speaker 1: have been doing ever since the beginning of the pandemic. 658 00:37:22,640 --> 00:37:26,560 Speaker 1: So so I think we are we are basically puttering 659 00:37:26,719 --> 00:37:29,879 Speaker 1: up and and appealing to a certain buyer base. That's 660 00:37:30,280 --> 00:37:33,440 Speaker 1: that's that's going to be doing the bidding of the government. 661 00:37:33,480 --> 00:37:36,040 Speaker 1: And also keep in mind, you know, we are also 662 00:37:36,120 --> 00:37:40,120 Speaker 1: in an environment where loan loan demand is very weak 663 00:37:41,080 --> 00:37:43,919 Speaker 1: and a bank needs to land that the bank bank 664 00:37:44,280 --> 00:37:46,960 Speaker 1: has has has capital, and that that needs to be deployed. 665 00:37:47,000 --> 00:37:52,799 Speaker 1: And so I think and another another very important thing 666 00:37:52,920 --> 00:37:55,920 Speaker 1: to keep in mind is that when you think about 667 00:37:56,160 --> 00:37:58,399 Speaker 1: the lending process, you know, a bank makes a loan 668 00:37:58,520 --> 00:38:01,160 Speaker 1: to be it's the past, it's the kind of tradition 669 00:38:01,239 --> 00:38:04,840 Speaker 1: that's the way things supposed to work. I guess that's traditional. 670 00:38:05,160 --> 00:38:08,200 Speaker 1: But the other version of this is a bank pis 671 00:38:08,200 --> 00:38:11,879 Speaker 1: of treasury security and creates a deposit when they when 672 00:38:11,960 --> 00:38:14,000 Speaker 1: they do that, and it's and the and then the 673 00:38:14,080 --> 00:38:16,400 Speaker 1: government is going to spend all that moody. So if 674 00:38:16,440 --> 00:38:19,120 Speaker 1: you think about this infrastructure built, for example, you know, 675 00:38:19,480 --> 00:38:22,600 Speaker 1: normally it's all the private sector building stuff. But when 676 00:38:22,600 --> 00:38:25,280 Speaker 1: the private sector is building stuff, you know, some developer 677 00:38:25,360 --> 00:38:27,600 Speaker 1: goes to a bank. You know, you want to build 678 00:38:27,680 --> 00:38:29,560 Speaker 1: HUDs And Yards, you go to a bank, you take 679 00:38:29,600 --> 00:38:33,040 Speaker 1: out of finances, okay, And so the bank made alone, 680 00:38:33,320 --> 00:38:36,200 Speaker 1: created a deposit, and the developer of Hudson Yards is 681 00:38:36,239 --> 00:38:38,440 Speaker 1: going to spend it to all the contractors. And so 682 00:38:38,600 --> 00:38:40,880 Speaker 1: that's what that looks like on the balance sheet of 683 00:38:40,920 --> 00:38:44,960 Speaker 1: the banking system. If it's the government doing infrastructure projects, 684 00:38:45,960 --> 00:38:48,080 Speaker 1: they will borrow the money and they will send it 685 00:38:48,160 --> 00:38:51,120 Speaker 1: to the little contractors to build whatever. So then all 686 00:38:51,160 --> 00:38:54,000 Speaker 1: of a sudden, it's not loan deposits, but it's treasury 687 00:38:54,040 --> 00:38:57,960 Speaker 1: securities the deposits. And probably we will see a lot 688 00:38:58,080 --> 00:39:01,480 Speaker 1: more of this type of lending going forward than we 689 00:39:01,600 --> 00:39:03,839 Speaker 1: have seen. You know, this pure form of the old 690 00:39:04,080 --> 00:39:06,400 Speaker 1: old type of landing which is all which is all 691 00:39:06,480 --> 00:39:09,160 Speaker 1: loan based, you know, this is this is basically the 692 00:39:09,280 --> 00:39:12,520 Speaker 1: future I think. I think the banks will be buying 693 00:39:12,520 --> 00:39:15,440 Speaker 1: a lot more treasuries and and a lot more mortgage 694 00:39:15,440 --> 00:39:18,320 Speaker 1: backed securities, and the fact that this strip of facility 695 00:39:18,520 --> 00:39:24,640 Speaker 1: is there to help in occasional liquidity hiccups, uh without 696 00:39:24,680 --> 00:39:26,880 Speaker 1: a stigma. I think I think it's going to be 697 00:39:26,960 --> 00:39:30,960 Speaker 1: a huge incentive. It's always about incentives, you know. Again 698 00:39:31,320 --> 00:39:33,759 Speaker 1: in retrospect, it's always simple, as I said, over the 699 00:39:33,800 --> 00:39:36,719 Speaker 1: past five years, were the most important marginal buyers that 700 00:39:36,800 --> 00:39:40,000 Speaker 1: were going forward, it will be the banks, And that 701 00:39:40,120 --> 00:39:42,040 Speaker 1: means that it's also going to be a very stable 702 00:39:42,120 --> 00:39:44,840 Speaker 1: form of funding government because it's all going to be 703 00:39:44,880 --> 00:40:05,200 Speaker 1: sticky deposits. So I'm a little bit concerned, just from 704 00:40:05,360 --> 00:40:10,360 Speaker 1: a a very like self interested financial journalist perspective, that 705 00:40:10,560 --> 00:40:15,160 Speaker 1: you're laying out a financial system that seems quite smooth 706 00:40:15,480 --> 00:40:19,600 Speaker 1: and seems like kind of unlikely to end up in 707 00:40:19,960 --> 00:40:23,080 Speaker 1: a massive blow up that you know, someone like me 708 00:40:23,280 --> 00:40:27,319 Speaker 1: can write lots of articles about um which in some ways, 709 00:40:27,400 --> 00:40:30,160 Speaker 1: you know, money markets and the repo market was always 710 00:40:30,200 --> 00:40:34,680 Speaker 1: supposed to be a boring area of the financial system 711 00:40:34,760 --> 00:40:38,200 Speaker 1: that just worked, but then it exploded in two thousand 712 00:40:38,200 --> 00:40:40,759 Speaker 1: and eight, and then we've had various explosions since then. 713 00:40:41,840 --> 00:40:45,680 Speaker 1: Is there anything interesting coming up in in Repo that 714 00:40:45,760 --> 00:40:48,719 Speaker 1: we should be watching out for, like, you know what 715 00:40:49,000 --> 00:40:52,000 Speaker 1: what should be getting us excited? Because you've described it 716 00:40:52,080 --> 00:40:59,160 Speaker 1: as this beautiful system and very smooth in terms of functioning. Yes, um, well, 717 00:40:59,200 --> 00:41:02,600 Speaker 1: as as I said it, it's quite depressing in my market. Um. 718 00:41:02,920 --> 00:41:05,360 Speaker 1: And you know, just just like you would like to 719 00:41:05,440 --> 00:41:08,040 Speaker 1: write about interesting things. You know, people want to put 720 00:41:08,080 --> 00:41:11,080 Speaker 1: on put on trades about you know, spread though ups 721 00:41:11,120 --> 00:41:14,880 Speaker 1: and whatnot. Um, yes, look you're right. I mean you know, 722 00:41:15,080 --> 00:41:19,840 Speaker 1: the the Dealer of Last Resort was missing from the 723 00:41:19,920 --> 00:41:24,400 Speaker 1: picture institutional, you know, like that's why we had that 724 00:41:24,480 --> 00:41:28,719 Speaker 1: September Time nineteen episode. Um, the spot lines are now 725 00:41:28,800 --> 00:41:32,640 Speaker 1: there standing, people cilities there, and the FET is doing 726 00:41:32,719 --> 00:41:35,040 Speaker 1: this dealer of last Resort thing on both sides of 727 00:41:35,120 --> 00:41:37,439 Speaker 1: its balianship. Right, So the FET is keeping interest rates 728 00:41:37,520 --> 00:41:41,680 Speaker 1: from going too low with the reversaryport facility. It's it's 729 00:41:41,760 --> 00:41:45,320 Speaker 1: keeping reports from gowerring too high. And and you know 730 00:41:45,400 --> 00:41:48,680 Speaker 1: the FX spot market from from from blowing up the 731 00:41:48,760 --> 00:41:52,200 Speaker 1: spot lines and so yes, this is a very this 732 00:41:52,360 --> 00:41:56,520 Speaker 1: is a very stable era of the system. I would 733 00:41:56,520 --> 00:42:00,040 Speaker 1: say that we are we are looking forward to but 734 00:42:00,239 --> 00:42:02,200 Speaker 1: but but I would also say that, you know, this 735 00:42:02,440 --> 00:42:06,680 Speaker 1: was a five year learning process of the FED, right 736 00:42:06,840 --> 00:42:09,800 Speaker 1: because what were the past five years about the past 737 00:42:09,840 --> 00:42:13,760 Speaker 1: five years were about. You know, we had financial reform, 738 00:42:14,520 --> 00:42:18,279 Speaker 1: we had Basil three, bank balance spits are less flexible, 739 00:42:19,200 --> 00:42:22,880 Speaker 1: you know, uh, you know, all all the things that 740 00:42:22,960 --> 00:42:25,680 Speaker 1: happened over the past five years. And so the FED 741 00:42:25,960 --> 00:42:29,960 Speaker 1: was still thinking. I would say that the Great Financial 742 00:42:30,040 --> 00:42:34,600 Speaker 1: Crisis was a it was a one off, and the 743 00:42:34,680 --> 00:42:37,640 Speaker 1: things we had to do then hopefully they will never 744 00:42:37,719 --> 00:42:40,320 Speaker 1: have to do again. And so here we are today 745 00:42:40,440 --> 00:42:43,000 Speaker 1: where some of the things that the set they during 746 00:42:43,040 --> 00:42:45,440 Speaker 1: your Great Financial crisis, some of the things that the 747 00:42:45,520 --> 00:42:53,000 Speaker 1: FED did last March March, they became institutionalized and they 748 00:42:53,040 --> 00:42:55,480 Speaker 1: are now standing facilities. So they are definitely going to 749 00:42:55,600 --> 00:42:59,840 Speaker 1: take the edge off of of a funding markets. And 750 00:43:00,080 --> 00:43:04,359 Speaker 1: so whether this is good or bad, what this means 751 00:43:04,440 --> 00:43:09,000 Speaker 1: is that the frontier is shifting elsewhere because whatever problems 752 00:43:09,080 --> 00:43:13,120 Speaker 1: they will have is probably going to happen and in 753 00:43:13,600 --> 00:43:18,200 Speaker 1: some in some other jurisdiction. But I think dollar funding 754 00:43:18,239 --> 00:43:23,080 Speaker 1: markets are are are are going to be much more stable, 755 00:43:23,640 --> 00:43:27,440 Speaker 1: much more stable going forward. Things will be very quiet 756 00:43:28,120 --> 00:43:30,320 Speaker 1: until we get to a point where the banking system 757 00:43:30,360 --> 00:43:34,319 Speaker 1: again is liability constraints because there's just so much cash 758 00:43:34,360 --> 00:43:37,360 Speaker 1: in the system that you know, the banks you're not 759 00:43:37,440 --> 00:43:40,520 Speaker 1: going to have any problem funding problems to the foreseeable future. 760 00:43:40,560 --> 00:43:42,960 Speaker 1: And you know, as band Bernanke said at the end 761 00:43:43,120 --> 00:43:47,040 Speaker 1: of the first three Qui episodes, you know, the first 762 00:43:47,080 --> 00:43:50,279 Speaker 1: balance is very big, and over time the economy and 763 00:43:50,320 --> 00:43:52,600 Speaker 1: the banking system is going to grow into this big 764 00:43:52,640 --> 00:43:55,480 Speaker 1: balance shot. I think in a similar vein is probably 765 00:43:55,560 --> 00:43:59,000 Speaker 1: going to take a few more in in in treasury 766 00:43:59,040 --> 00:44:03,760 Speaker 1: securities and in a few more trillions. It's before before 767 00:44:03,800 --> 00:44:07,360 Speaker 1: all this access access cash gets get soaked up. But 768 00:44:07,440 --> 00:44:11,320 Speaker 1: again once that, once that type type security environment arrives, 769 00:44:11,760 --> 00:44:14,319 Speaker 1: I think abouts and suspenders around how we are going 770 00:44:14,360 --> 00:44:17,319 Speaker 1: to deal with that types are are indeed just going 771 00:44:17,440 --> 00:44:22,320 Speaker 1: to to make things um less, less spectacular and spread 772 00:44:22,360 --> 00:44:25,239 Speaker 1: the while still be less spectacular than they were. It's 773 00:44:25,280 --> 00:44:28,320 Speaker 1: been benefiting and and and the beginning of the pandemic. 774 00:44:28,680 --> 00:44:31,080 Speaker 1: I think it's an end of an era. Yeah, it 775 00:44:31,200 --> 00:44:35,200 Speaker 1: sounds like a much more boring system awaits us a 776 00:44:35,280 --> 00:44:40,160 Speaker 1: less spectacular system Sulton, it's great having you on as always. 777 00:44:40,400 --> 00:44:44,080 Speaker 1: Thank you so much. Okay, thank thanks for thanks for thanking. 778 00:44:59,560 --> 00:45:02,640 Speaker 1: So i' don't have that much to add to what 779 00:45:02,760 --> 00:45:06,359 Speaker 1: Salton just said, And of course it's always weird doing 780 00:45:06,440 --> 00:45:09,360 Speaker 1: this when I'm basically talking to myself, but I do 781 00:45:09,560 --> 00:45:12,799 Speaker 1: think the end of an era idea is an interesting one, 782 00:45:12,880 --> 00:45:15,680 Speaker 1: and it does feel like we've seen a sort of 783 00:45:16,600 --> 00:45:20,719 Speaker 1: step change in the repo market, given that we now 784 00:45:20,840 --> 00:45:23,120 Speaker 1: have these two facilities. As Alton said, you have the 785 00:45:23,200 --> 00:45:26,200 Speaker 1: reverse repot facility that is putting a floor under rates, 786 00:45:26,200 --> 00:45:29,160 Speaker 1: and then you have the standing facility that's basically putting 787 00:45:29,560 --> 00:45:33,920 Speaker 1: a ceiling on rates, And it just feels like, I 788 00:45:33,960 --> 00:45:35,560 Speaker 1: don't know, the system is going to be much more 789 00:45:35,600 --> 00:45:39,400 Speaker 1: constrained or much more controlled, much more steady going forward. 790 00:45:39,600 --> 00:45:42,719 Speaker 1: So I guess we'll have to wait and see what happens. Um. 791 00:45:43,160 --> 00:45:45,319 Speaker 1: You know, with a new system, there's always the chance 792 00:45:45,400 --> 00:45:49,799 Speaker 1: that you do see new risks develop. Um, So maybe 793 00:45:49,840 --> 00:45:52,640 Speaker 1: there's something out there that no one has seen yet 794 00:45:52,880 --> 00:45:56,120 Speaker 1: and we will get a chance to write something about 795 00:45:56,160 --> 00:46:00,160 Speaker 1: it one day. Okay, this has been another episode of 796 00:46:00,360 --> 00:46:03,360 Speaker 1: the All Thoughts podcast. I'm Tracy Alloway. You can follow 797 00:46:03,400 --> 00:46:07,560 Speaker 1: me on Twitter at Tracy Alloway. Joe isn't here, but 798 00:46:07,680 --> 00:46:10,719 Speaker 1: of course you can follow him on Twitter at The Stalwart. 799 00:46:11,080 --> 00:46:16,880 Speaker 1: You can also follow our producer Laura Carlson at Laura M. Carlson. 800 00:46:17,520 --> 00:46:21,120 Speaker 1: And you can follow Bloomberg's head of podcast Francesco Levi 801 00:46:21,480 --> 00:46:24,200 Speaker 1: at Francesca Today. Thanks for listening.