WEBVTT - Zoltan Pozsar on What’s Going on in Rates Markets Right Now 0:00:11.160 --> 0:00:14.920 Hello, and welcome to another episode of the Odd Thoughts podcast. 0:00:15.040 --> 0:00:18.640 I'm Tracy Alloway. My co host Joe Wisenthal is away 0:00:18.680 --> 0:00:23.920 this week. I am recording this on September one, which 0:00:24.000 --> 0:00:28.120 means it is the start of a new quarter. And 0:00:28.200 --> 0:00:30.880 whenever we have the start of a new quarter, it's 0:00:31.040 --> 0:00:34.360 usually a time to start reflecting on what's happening in 0:00:34.440 --> 0:00:38.120 money markets. And there has been a lot happening in 0:00:38.240 --> 0:00:41.559 money markets so far this year. So you know, just 0:00:41.640 --> 0:00:46.320 today we have a d two participants placing one point 0:00:46.440 --> 0:00:53.120 one nine trillion dollars at the FEDS Reverse Repurchase Agreement Facility, 0:00:53.440 --> 0:00:56.800 the Reverse Repo Facility UM. And I have to say, 0:00:57.440 --> 0:01:00.280 the US financial system right now is kind of a 0:01:00.400 --> 0:01:03.760 wash in liquidity, and it has been for some time, 0:01:04.520 --> 0:01:07.800 and that's causing problems for banks who have to handle 0:01:07.840 --> 0:01:11.520 all these deposits, problems for money market funds, and of 0:01:11.560 --> 0:01:15.119 course problems for the FED. So all this liquidity means 0:01:15.200 --> 0:01:19.199 that money market rates have basically been pressured lower all 0:01:19.319 --> 0:01:22.679 year UM, so much so that the FED has actually 0:01:22.720 --> 0:01:26.040 had to tweak some of its facilities, including the reverse 0:01:26.080 --> 0:01:29.520 repot facility, back in June to prevent those rates from 0:01:29.520 --> 0:01:33.400 going even lower and more recently it surprised the market 0:01:33.680 --> 0:01:39.160 by introducing a standing repot facility. So we have had 0:01:39.200 --> 0:01:42.320 a lot of requests to talk about this on all lots, 0:01:42.360 --> 0:01:45.559 and no surprise, we've had requests to speak to one 0:01:45.640 --> 0:01:50.360 person in particular, repeat all loots guests, We're gonna be 0:01:50.400 --> 0:01:53.720 talking to re Sultan Posar, of course, the equobal head 0:01:53.760 --> 0:01:57.560 of short term interest rates over at Credit Swiss. Sultan, 0:01:57.800 --> 0:02:00.840 welcome to the show again. Thank you very much for 0:02:00.880 --> 0:02:04.480 having me back. So I'm trying to think where to start, 0:02:04.560 --> 0:02:09.160 but maybe you could begin by describing the general state 0:02:09.760 --> 0:02:13.560 of liquidity and money markets at the moment. Like when 0:02:13.560 --> 0:02:17.560 I say the financial system is a wash in liquidity, 0:02:17.760 --> 0:02:21.160 what exactly do we mean the general What is the 0:02:21.160 --> 0:02:25.000 general state? The general state is things that haven't happened 0:02:25.000 --> 0:02:29.680 before are now happening. So so again, let's let's perhaps 0:02:29.680 --> 0:02:32.280 start with cross curency basis. This is something that we 0:02:32.320 --> 0:02:34.960 are used to as as being very negative. You know, 0:02:35.000 --> 0:02:39.280 there is also there's always an excess demand for dollars, 0:02:39.320 --> 0:02:42.239 and that excess demand for for for dollars has gone 0:02:42.280 --> 0:02:45.440 to cross curency basis is pretty much closed. You have 0:02:45.560 --> 0:02:49.280 some jurisdictions smaller countries for the cross currency basis is 0:02:49.320 --> 0:02:55.160 even positive Mexico, South Africa, in China's you know, these 0:02:55.160 --> 0:02:58.239 are these are these are quite unusual things. Library is 0:02:58.440 --> 0:03:01.800 dormant and in the base still wise is three basis 0:03:01.800 --> 0:03:06.080 points very tight. People and bill yields are are very low. 0:03:06.160 --> 0:03:08.399 And you know, but this, but this is a reflection 0:03:08.400 --> 0:03:11.239 of the is naturally just you know, too much cash 0:03:11.480 --> 0:03:15.480 in the system relative to demand for this funny you know, 0:03:15.680 --> 0:03:18.480 I think, unfortunately, I think we are in a period 0:03:18.480 --> 0:03:21.400 where things are going to be very different for quite 0:03:21.440 --> 0:03:24.440 some time relative to how things were over the past 0:03:24.480 --> 0:03:27.280 five years. I think over the past five years we've 0:03:27.280 --> 0:03:31.320 had sort of a golden era for stir traders because 0:03:31.360 --> 0:03:34.280 we've had so many, so many spread moves in the 0:03:34.280 --> 0:03:37.320 money markets. You know, the liboiary basis or the cross 0:03:37.320 --> 0:03:40.480 currency basis has done. You know, the people markets acted 0:03:40.480 --> 0:03:43.400 out in the past. But if you think about why 0:03:44.040 --> 0:03:48.040 liquidity was tight as opposed to abundance, they're basically three weeks. 0:03:48.960 --> 0:03:52.640 You know, the FED stubbed QUEI in twenty fifteen, and 0:03:52.680 --> 0:03:55.480 then the ECB and the d o J were just starting. 0:03:55.520 --> 0:03:57.520 So we were in this position where there was an 0:03:57.520 --> 0:03:59.600 excess supply of euro and a end people didn't know 0:03:59.640 --> 0:04:02.360 what to do. The responsed for dollars, so that rope 0:04:02.480 --> 0:04:05.520 that that special as the dollar in in the xpot market. 0:04:06.320 --> 0:04:09.400 Then we had fossil free that was getting rolled out, 0:04:10.000 --> 0:04:13.760 and so nobody understood that, right, So you had this 0:04:13.880 --> 0:04:18.279 relative shortage of dogs combined with an ever growing shortage 0:04:18.279 --> 0:04:21.760 of balance sheet for various parts of basil getting rolled 0:04:21.800 --> 0:04:25.440 out l C R, SLR GC S. Course, you know, 0:04:25.480 --> 0:04:28.520 the banks themselves had to learn how to manage these ratios, 0:04:28.720 --> 0:04:32.640 the market learn how to trade these ratios, and then 0:04:32.680 --> 0:04:37.239 we had these little idiosyncredic things like money funderform, corporate 0:04:37.320 --> 0:04:39.720 text reform, and so these rollways back in the rent 0:04:39.960 --> 0:04:42.280 some of the most experienced STIR traitors will tell you 0:04:42.320 --> 0:04:45.039 that they've never traded as much front and basis in 0:04:45.080 --> 0:04:48.000 their career. You know, some of those careers spent thirty 0:04:48.080 --> 0:04:52.160 years as they did between twenty fifteen, and so then 0:04:52.200 --> 0:04:57.280 you fast forward to today. We now have so much liquidity. Uh, 0:04:57.320 --> 0:04:59.760 and this is this is particularly a case for the US. 0:04:59.800 --> 0:05:03.760 Do learn that you know, the FED is doing que 0:05:04.200 --> 0:05:06.839 faster than than the B O J or the E 0:05:06.920 --> 0:05:09.159 C B. So so there is, there's just an ample 0:05:09.200 --> 0:05:13.159 supply view as dollars. Regulations are not getting tighter, if anything, 0:05:13.279 --> 0:05:17.279 they are getting easier. The FED has become a dealer 0:05:17.320 --> 0:05:19.920 of less resorts, the swap mindes. We have the standing 0:05:19.960 --> 0:05:23.320 people facility before banks. We have to standing people facility 0:05:23.400 --> 0:05:26.719 for foreign central banks. So so this is a very 0:05:26.720 --> 0:05:29.640 different environment. And then in the midst of this, you know, 0:05:29.880 --> 0:05:31.960 a lot of the community, a lot of balance sheets, 0:05:32.800 --> 0:05:36.240 a lot of excess cassion systems. There's also you know, 0:05:36.320 --> 0:05:38.640 not as much activity in the world economy that needs 0:05:38.640 --> 0:05:42.520 to get announced. So if you just think about why 0:05:42.720 --> 0:05:46.080 foreign banks elsewhere, you know, borrow dollars because they need 0:05:46.120 --> 0:05:51.040 to finance traight those or or whatnot's death demand is dormant. 0:05:51.160 --> 0:05:53.920 I think I think capital clothes are a bit more domestic. 0:05:54.160 --> 0:05:56.160 You know, the the FX hedge cloths are not as 0:05:56.360 --> 0:06:00.360 dominant as they the relative value hedge funds a kind 0:06:00.360 --> 0:06:03.000 of checked out at the moment because there's not a 0:06:03.000 --> 0:06:06.240 lot of opportunities and so you know, there's you know, 0:06:06.279 --> 0:06:09.159 the best reflection of of all these sex cases you 0:06:09.240 --> 0:06:11.480 mentioned is all this one point actually, and that is 0:06:11.520 --> 0:06:14.000 of cash that's sitting in the report facility that you 0:06:14.440 --> 0:06:18.360 literally want to think about as money the system doesn't need, 0:06:18.400 --> 0:06:20.680 either because it doesn't have the balance sheet for it, 0:06:20.800 --> 0:06:23.960 or because there's no use or outfit for that money. 0:06:24.200 --> 0:06:26.120 All right, This brings me to my next question, because 0:06:26.120 --> 0:06:28.520 I think a lot of people when they hear that 0:06:28.560 --> 0:06:32.760 the system is a washing liquidity, there's all this excess cash, 0:06:32.880 --> 0:06:36.360 a lot of people wouldn't necessarily think that's a bad thing. 0:06:36.560 --> 0:06:39.240 And yet you know, clearly this is something that the 0:06:39.279 --> 0:06:42.520 Fed at least has been responding to. Um I mentioned 0:06:42.520 --> 0:06:44.720 that it tweaked the reverse reboth facility and then it 0:06:44.800 --> 0:06:50.800 started the standing repo facilities. What exactly is the problem here? Well, 0:06:51.160 --> 0:06:53.599 I wouldn't say that it's a problem. I think that 0:06:53.680 --> 0:06:56.760 the way I think that the way all this is 0:06:56.800 --> 0:07:00.360 clearing in the system is actually quite do you beutiful 0:07:00.360 --> 0:07:04.320 and kind of hastlement and problem free? I think you're 0:07:04.360 --> 0:07:07.880 the only person that would describe us as beautiful. Well, look, 0:07:07.880 --> 0:07:12.480 I think it's beautiful because you know, the designed the 0:07:12.640 --> 0:07:15.240 system basically, so you know, I mean, you put you 0:07:15.280 --> 0:07:17.440 put reserves in. You know, the central bank is a 0:07:17.480 --> 0:07:20.680 balance sheet, and then someone has to hold the liabilities 0:07:20.720 --> 0:07:23.800 of central bank, and we have a beautiful mechanism where 0:07:24.200 --> 0:07:27.240 you know this money is going to flow through the 0:07:27.240 --> 0:07:30.040 past path of reefs, resistance to whoever has the balance 0:07:30.480 --> 0:07:32.360 and so and so that's what we're seeing. And again 0:07:32.440 --> 0:07:35.920 you know the reverse reple facility. You literally want to 0:07:35.960 --> 0:07:39.800 think about there as foam on the runway, So it 0:07:39.840 --> 0:07:43.600 doesn't matter how big a plane you're gonna eventually crashed 0:07:43.640 --> 0:07:45.920 on the runway. There's a lot of foam there, so 0:07:45.960 --> 0:07:49.120 the impact is not going to be painful. So what 0:07:49.160 --> 0:07:51.640 do I mean by that? You know, people people talk 0:07:51.680 --> 0:07:55.520 about let's find let's find some some you know, stread 0:07:55.560 --> 0:07:58.600 opportunity we can trade in the money. Maybe there's gonna 0:07:58.600 --> 0:08:01.320 be a run on teather and you know that that 0:08:01.360 --> 0:08:03.640 tater is going to have to sell you know, sixty 0:08:03.680 --> 0:08:06.400 billion dollars of commership or something like that. I mean, 0:08:06.440 --> 0:08:09.080 you know, there these ideas floating out there because we 0:08:09.160 --> 0:08:11.800 don't really have a lot of ideas to trade. So 0:08:12.240 --> 0:08:15.560 what would happen in such a scenario? Nothing? I mean 0:08:15.960 --> 0:08:19.320 on money fund complex that has one point two trillion 0:08:19.360 --> 0:08:23.400 dollars stashed away at the at the reverse ory earning 0:08:23.440 --> 0:08:26.720 five basis points whatever this location you go hav in 0:08:26.720 --> 0:08:29.600 the CP market from someone having to sell sixty billion 0:08:29.640 --> 0:08:33.520 dollars commercial paper hypothetically is going to be scooped up 0:08:33.840 --> 0:08:36.839 and they will be asking for more opportunities like that, right, 0:08:36.840 --> 0:08:39.160 So this is this is just exper cash that will 0:08:39.240 --> 0:08:44.000 be there too to get deployed to to harvest whatever 0:08:44.360 --> 0:08:48.440 spread having affex swamps or or or spy or live 0:08:48.559 --> 0:08:51.960 or or so so that's a lot. Now people often 0:08:52.000 --> 0:08:54.120 bring up, you know, this is a problem for the banks, 0:08:54.160 --> 0:08:56.480 but again this is not really a problem for the banks, 0:08:56.559 --> 0:09:00.120 because you know, the banks now have again and I 0:09:00.120 --> 0:09:04.640 think it's quite beautiful a mechanism whereby if in the 0:09:04.679 --> 0:09:08.000 morning they have cash coming in that they don't have 0:09:08.160 --> 0:09:11.319 the balance sheet for, they can just push that cash 0:09:11.320 --> 0:09:14.160 away in the afternoon, you know, and so that money 0:09:14.240 --> 0:09:16.640 that that that comes in in the morning and swells 0:09:16.679 --> 0:09:19.080 the bank's balance sheets to push it away into the 0:09:19.080 --> 0:09:21.359 money funds and the money funds can taste it at 0:09:21.400 --> 0:09:24.320 the reverse people facility. You know, this is a mechanism 0:09:24.760 --> 0:09:29.120 that enables the system to kind of clear and and 0:09:29.200 --> 0:09:33.280 get around the balance sheet bottlenecks. And you know, the 0:09:33.320 --> 0:09:36.520 reverse triple facility has no limits. I mean, it's eighty 0:09:36.559 --> 0:09:39.000 billion dollars per counter party. We are, you know, some 0:09:39.080 --> 0:09:42.079 distance away still from some some accounts maxing out the 0:09:42.240 --> 0:09:44.479 kind of party limit, but you know, the set indicated 0:09:44.520 --> 0:09:47.000 that they can base the kind of party cap to 0:09:47.000 --> 0:09:50.959 to a much higher number. So so really there's there's 0:09:51.040 --> 0:09:54.679 there's no limits to you know, this system is well designed, 0:09:54.679 --> 0:09:57.000 it's well built, it's working, and it's doing what it's 0:09:57.000 --> 0:10:00.439 supposed to do. And frankly, I think, you know, all 0:10:00.480 --> 0:10:02.920 this money that's going into money funds and ultimately it 0:10:03.000 --> 0:10:06.520 is getting deployed in the in the reverse report facility, 0:10:06.720 --> 0:10:09.160 you want to think about it two ways. You know, 0:10:09.200 --> 0:10:13.240 there's two things happening. Number one, we have massive bill 0:10:13.280 --> 0:10:16.800 paidowns that are happening at the moment, because that's something 0:10:17.280 --> 0:10:20.720 to talk about. But you know, there's these bill paidowns 0:10:20.840 --> 0:10:24.400 and so money funds are losing the current asset that 0:10:24.440 --> 0:10:26.760 they have in their existing book of business and then 0:10:26.840 --> 0:10:29.600 they have cash coming and then they need to places 0:10:29.679 --> 0:10:31.920 somewhere else. And that's the RRP facilities. So that's just 0:10:31.960 --> 0:10:36.480 a rotation within within these money fund portfolios. The other 0:10:36.800 --> 0:10:39.240 is new money that into the money funds, and that 0:10:39.360 --> 0:10:42.280 new money is the money that the large banks are 0:10:42.440 --> 0:10:45.400 are pushing away because they don't have the balance sheet 0:10:45.400 --> 0:10:49.800 for them. And so there is something very very interesting happen, 0:10:50.000 --> 0:10:52.800 which is which is that at any given point in time, 0:10:52.800 --> 0:10:56.840 when the bank gets a new deposits, especially under COVID, 0:10:57.440 --> 0:11:01.960 it's either a new deposit because there is q WE happening. 0:11:02.040 --> 0:11:04.599 And it's how you know, when q WE have, the 0:11:04.679 --> 0:11:07.000 pasites get created in the banking system, but those are 0:11:07.040 --> 0:11:12.200 low quality deposits, become institutions sold a bond to the 0:11:12.240 --> 0:11:15.440 Fed and got that institutional hot money that doesn't really 0:11:15.480 --> 0:11:17.520 have a lot of value from the perspective of the bank. 0:11:17.960 --> 0:11:20.600 So the banks are pushing that stuff away. And then 0:11:20.640 --> 0:11:24.120 there's also still a lot of stimulus happening, you know, 0:11:24.160 --> 0:11:27.320 unemployment insurance text you're going out, we have COVID payments, 0:11:27.360 --> 0:11:30.559 we have all sorts of payments that the government is 0:11:30.559 --> 0:11:34.040 still making to the households. Those are the good deposits. 0:11:34.080 --> 0:11:37.760 So if you have a banking system that is balance constrained, 0:11:37.760 --> 0:11:40.640 then the largest banks are balancing extreme in the US. 0:11:41.160 --> 0:11:43.439 You know, this is also a mechanism that enables these 0:11:43.480 --> 0:11:46.480 banks to take all these deposits as they are coming 0:11:46.520 --> 0:11:48.720 in and then at the end of the day make 0:11:48.760 --> 0:11:51.160 a choice as to this is good quality, this is 0:11:51.200 --> 0:11:53.480 bath quality. So the good quality I want to make 0:11:53.559 --> 0:11:55.840 room for him at Talantreet and I want to retain it. 0:11:56.320 --> 0:11:58.760 And it's bad stuff. I just want to push away 0:11:58.840 --> 0:12:01.760 into the money fund because it's absolutely no value from 0:12:01.840 --> 0:12:05.600 from from a liquidity perspective, and so it's actually a 0:12:05.600 --> 0:12:09.200 facility that helps the banks to cherry pick of the 0:12:09.240 --> 0:12:13.160 posits they want old and so it works, it works, 0:12:13.320 --> 0:12:15.920 and you know, you know, we often think about the 0:12:16.040 --> 0:12:20.520 RP facility as the floor underpinning the basement of money 0:12:20.520 --> 0:12:22.280 market trades, and it's and it's a floor to money 0:12:22.280 --> 0:12:25.680 market trads too, So I think it's big, but it's 0:12:25.720 --> 0:12:29.280 doing as it's supposed to do. And frankly, absolutely no 0:12:29.440 --> 0:12:32.560 difference between you know, treasuries cash banans being at one 0:12:32.600 --> 0:12:35.120 and a half Julian or the reverse reposacility being at 0:12:35.160 --> 0:12:37.560 one and a half Julian. It's it's the same thing. 0:12:37.679 --> 0:12:40.880 It's just there's a different mechanisms through which the system 0:12:41.040 --> 0:13:02.520 was it So if the reverse were facility is successful 0:13:02.760 --> 0:13:04.920 in the sense that you know, it's setting the floor 0:13:05.080 --> 0:13:08.680 on interest rates um and it's soaking up this excess 0:13:08.800 --> 0:13:12.400 on liquidity in the system. Why did the FED fuel 0:13:12.440 --> 0:13:16.200 the need to start paying interest on it? So you know, 0:13:16.400 --> 0:13:19.439 interest used to be zero and then in June the 0:13:19.480 --> 0:13:23.000 FED raised it to five basis points. And here I 0:13:23.000 --> 0:13:25.679 think I should note that this is actually a call 0:13:25.840 --> 0:13:29.080 that you got wrong, right, you You weren't expecting them 0:13:29.440 --> 0:13:32.400 to raise that interest. So what's going on there? And 0:13:32.440 --> 0:13:34.880 what's your take on that? Yes, that that's that's a call. 0:13:35.120 --> 0:13:37.880 That's a call I get wrong. Look, I think I 0:13:37.920 --> 0:13:42.760 would say it's an extreme aversion to negative interest rates 0:13:42.800 --> 0:13:46.920 in the us UM which I basically which I basically misread. 0:13:47.160 --> 0:13:50.520 You know, the interest on the reverse people was raised 0:13:50.640 --> 0:13:54.480 to five basis points because I mean, look, the backdrop 0:13:54.559 --> 0:13:56.480 part this is, you know, if you're the FED, you 0:13:56.559 --> 0:13:58.880 have two groups talked to all the time, the banks 0:13:58.880 --> 0:14:01.920 and the money fund The banks are telling you I 0:14:01.960 --> 0:14:04.400 can't take any more to passes because I'm cool. You know, 0:14:04.440 --> 0:14:06.840 I have an SLR and I have an SLAR constrained. 0:14:06.920 --> 0:14:09.600 You know, the reserves haven't been exempted from the SAR. 0:14:09.840 --> 0:14:12.400 I'm not going to take the money funds are telling 0:14:12.400 --> 0:14:13.880 you what. I'm not going to take the money either, 0:14:13.960 --> 0:14:18.560 because you know the rps are zero. I have certain 0:14:18.600 --> 0:14:22.040 fixed costs, variable costs that are a function on my 0:14:22.080 --> 0:14:25.440 assets under management. So I need to be able to 0:14:25.480 --> 0:14:28.120 make a buck, you know, if I take new money. 0:14:28.640 --> 0:14:32.400 You know, my my argument was basically, you can money 0:14:32.400 --> 0:14:36.400 fund could ultimately charge charge the end investors a fee 0:14:36.640 --> 0:14:39.920 for or for taking their money. I think it would 0:14:39.960 --> 0:14:42.880 be the end of the world. Um, because at the 0:14:42.960 --> 0:14:45.960 end of the day, the FET cares about the constellation 0:14:46.000 --> 0:14:48.880 of the administered of the of the of the overnight 0:14:48.960 --> 0:14:51.120 rates that it's looking at, which are all inter bank grates. 0:14:51.200 --> 0:14:55.160 You know, FET funds, euro dollars, soper repo, all that stuff. 0:14:55.720 --> 0:14:58.240 But you know, the FET shouldn't really care about the 0:14:58.360 --> 0:15:02.640 rate two end investors. Right, there's a big difference between 0:15:02.720 --> 0:15:05.960 rates to end investors and inter bank rates. Because that 0:15:06.080 --> 0:15:09.920 was my prior and so, as you said, I was wrong. 0:15:10.000 --> 0:15:13.080 But what did we learned from this from this episode 0:15:13.080 --> 0:15:15.240 of being wrong. I think what we've learned is that, 0:15:15.640 --> 0:15:17.680 you know, the FED care is not only about these 0:15:18.160 --> 0:15:22.840 inter bank rates, but the FED also cares about rates 0:15:22.840 --> 0:15:26.960 to end investors. They are averse to even bill yields 0:15:27.000 --> 0:15:30.360 going negative in episodes other than a master prisis you 0:15:30.400 --> 0:15:33.480 know last March. They don't want money fund fields to 0:15:33.480 --> 0:15:36.360 be negative. They don't want the positive rates in the 0:15:36.400 --> 0:15:39.120 banking system to be to be negative. So so they 0:15:39.160 --> 0:15:42.640 basically just raised the r a period to five basis points. 0:15:42.680 --> 0:15:45.800 I think the money funds got an asset that is 0:15:45.840 --> 0:15:50.560 sufficient for them to which yields enough for them to 0:15:50.600 --> 0:15:53.640 be able to cover their costs to even charge the 0:15:53.720 --> 0:15:56.200 feed to investors, and for the end investors to end 0:15:56.280 --> 0:15:58.640 up with with a with a with a positive field. 0:15:58.640 --> 0:16:00.960 So I think I think the you know, the short 0:16:01.000 --> 0:16:04.560 answer is there's that extreme aversion the negative. It's just 0:16:04.600 --> 0:16:07.920 something beyond the the US. I'm kind of amused that 0:16:08.000 --> 0:16:12.080 so many people complain about the FED manipulating interest rates 0:16:12.080 --> 0:16:16.960 and meanwhile the FED is concerned about private actors manipulating 0:16:17.000 --> 0:16:21.040 interest rates downwards to a to a negative level. So 0:16:21.240 --> 0:16:23.400 one of the reasons Joe and I love having you 0:16:23.480 --> 0:16:26.640 on the show Resultan is because you do this research 0:16:26.760 --> 0:16:30.920 that is incredibly granular, where you talk about, you know, 0:16:31.120 --> 0:16:35.120 the individual incentives for each bank, why they do the 0:16:35.120 --> 0:16:37.560 things that they do. You just touch on it, you know, 0:16:37.600 --> 0:16:39.720 with the Federal Reserve, the idea that the FED is 0:16:39.760 --> 0:16:45.720 absolutely loath to have negative rates in the headlines basically, Um, 0:16:45.760 --> 0:16:50.720 can you walk us through exactly how banks are thinking 0:16:51.040 --> 0:16:56.040 about various forms of cash like instruments at the moment. 0:16:56.120 --> 0:16:58.120 So you know, when we say the system is a 0:16:58.160 --> 0:17:04.000 washing liquidity, that liquidity kind of comes in different formats. 0:17:04.000 --> 0:17:06.040 So you know, you can have US treasuries, you can 0:17:06.080 --> 0:17:10.040 have agency nbs, um, you can have excess reserves that 0:17:10.359 --> 0:17:13.840 banks get from the FED. And I'm wondering, like, how 0:17:14.440 --> 0:17:20.960 are banks thinking about that mix at the moment. Well, Um, 0:17:21.000 --> 0:17:24.240 it's a it's it's it's a simple it's a simple answer. 0:17:25.280 --> 0:17:28.359 At various points over the past five years. You know, 0:17:28.440 --> 0:17:33.400 these liquidity portfolios are always are always being up. So 0:17:33.640 --> 0:17:36.480 you know, whatever is the yield st that's that's what 0:17:36.600 --> 0:17:40.439 the banks do with that liquidity. Look. Uh, sometimes you 0:17:40.480 --> 0:17:43.159 know they lend into the reple market because it feels 0:17:43.200 --> 0:17:46.920 better than underserves at the FED. Interest on reserves is 0:17:46.960 --> 0:17:50.880 always there is the starting point, of course. Uh. Sometimes 0:17:50.880 --> 0:17:53.639 you lend in the f X spot market because yields 0:17:53.640 --> 0:17:57.920 are much better there. And in both of these cases, 0:17:58.040 --> 0:18:01.400 you know, the opportunity set is pretty it's pretty bad. 0:18:01.480 --> 0:18:03.440 I mean, you know REPO is well below I O 0:18:03.640 --> 0:18:06.560 or as I said, you know, the relative value you 0:18:06.600 --> 0:18:09.040 hedge from community. It's kind of checked out at the 0:18:09.040 --> 0:18:11.399 moment because there's there's not a lot of you know, 0:18:11.480 --> 0:18:15.080 bond basis opportunities um to to to put on and 0:18:15.119 --> 0:18:17.760 to the funds. So so the report market is is 0:18:17.920 --> 0:18:21.160 very quiet. The fx pop market. Similarly, when you look 0:18:21.200 --> 0:18:23.679 at you know, the the very front and points in 0:18:23.720 --> 0:18:25.800 the fx S pop market for these tanks are active 0:18:26.720 --> 0:18:30.359 tom next spot next points implied yields are just the 0:18:30.400 --> 0:18:33.640 basis point above io. We are, I mean, we've never 0:18:33.680 --> 0:18:36.960 seen things this tide since pots of peoples rolled out. 0:18:37.000 --> 0:18:40.119 So this is this is uh, this is again what 0:18:40.320 --> 0:18:43.440 we started the conversation with. It's too much, too much security, 0:18:43.560 --> 0:18:46.919 not a demand for this cash. Sometimes, you know, the 0:18:46.920 --> 0:18:49.360 fx S pop market and the report market will also 0:18:49.600 --> 0:18:52.000 each other and so the fex pop market can pull 0:18:52.040 --> 0:18:55.879 the report rates up. But so money markets again or doormant. 0:18:55.880 --> 0:18:58.680 So if you're a bank portfolio, you cannot truly do 0:18:58.760 --> 0:19:02.440 anything but go out and when you go out the curve, 0:19:02.520 --> 0:19:04.720 you will be looking at other age curity, which is 0:19:04.920 --> 0:19:08.439 which is mortgages, mortgages and treasuries, and then you know 0:19:08.480 --> 0:19:10.600 you can you can buy these treasuries which offer a 0:19:10.640 --> 0:19:13.880 spread over row I s or can buy it out right, 0:19:14.000 --> 0:19:15.840 you can buy it, buy it an asset spot. But 0:19:15.880 --> 0:19:20.680 basically treasury securities are the frontier. And when you look 0:19:20.720 --> 0:19:23.480 at when you look at the bank h portfolios, you 0:19:23.560 --> 0:19:26.120 will you will see that you know, they have they 0:19:26.160 --> 0:19:30.960 have added a lot of treasury securities under the pandemic. 0:19:31.160 --> 0:19:34.040 And so you know, good for you as government because 0:19:34.160 --> 0:19:35.800 they have a lot of paper that they that they 0:19:35.840 --> 0:19:39.119 need to issue. But that's basically where the money is 0:19:39.160 --> 0:19:42.160 going at the at the moment. I think I think 0:19:42.160 --> 0:19:44.600 it would also be interesting to kind of dig into, 0:19:45.000 --> 0:19:47.879 you know, some bank by bank examples of ending in 0:19:47.920 --> 0:19:51.800 this department, because you know, when we talk about banks, 0:19:52.160 --> 0:19:55.000 it sounds like it's plural, right, because there's a lot 0:19:55.000 --> 0:19:57.840 of banks. But actually what's happening is that there's only 0:19:58.480 --> 0:20:01.280 two banks really that have done all the heavy lifting 0:20:01.280 --> 0:20:03.920 in terms of in terms of buying all these treasuries, 0:20:03.960 --> 0:20:07.560 and and that those two banks are Hip Morgan and 0:20:07.600 --> 0:20:10.280 Bank of America. These are these are two of the 0:20:10.320 --> 0:20:13.600 most important creditors to the US government at the moment, 0:20:14.480 --> 0:20:16.760 other than other than the set up of course, you know, 0:20:16.840 --> 0:20:19.440 but but these are two banks that that approached their 0:20:19.600 --> 0:20:23.080 their bond buying strategy completely differently. And you know what 0:20:23.119 --> 0:20:25.320 I will say now is you know some of the 0:20:25.320 --> 0:20:27.680 things that have been said at at these banks earnings 0:20:27.680 --> 0:20:31.639 calls and so it's not not an inside d or 0:20:31.680 --> 0:20:35.320 anything like that. You know, the Bank of America's management 0:20:35.560 --> 0:20:37.760 has mentioned a number of times and they're on their 0:20:37.760 --> 0:20:40.800 earnings calls that they are they are happy with the 0:20:40.840 --> 0:20:43.960 fact that they have called the bottom in rates during 0:20:44.000 --> 0:20:47.320 the third quarter of twenty twenty. They have been slowing 0:20:47.600 --> 0:20:52.800 all their access security into into the mortgage markets ever since. 0:20:52.840 --> 0:20:56.600 So they have this programmatic buying of treasury securities and 0:20:56.600 --> 0:21:00.399 they are always in the market regardless of of abew. 0:21:00.480 --> 0:21:03.119 That was simply because you know, that's a bank that 0:21:03.240 --> 0:21:06.840 has that has a management philosophy where look, there is 0:21:06.880 --> 0:21:10.160 no low demands, but these deposits keep coming in. So 0:21:10.280 --> 0:21:12.320 we're a bank. So if the deposits are coming in 0:21:12.359 --> 0:21:14.359 but there's no law demand, we have to do something 0:21:14.359 --> 0:21:17.120 with this excess case. So we just you know, buy securities. 0:21:17.640 --> 0:21:21.560 If households and corporations don't borrow, but the government does. 0:21:21.760 --> 0:21:24.919 You know, we're just underprid that. JP Morgan is a 0:21:24.920 --> 0:21:27.879 bit more different because they always have you know, strong 0:21:28.040 --> 0:21:32.560 views about rates, and so Jamie Diamonds letter to shareholders 0:21:32.040 --> 0:21:36.359 and he basically said, kilds are moving higher, elation is 0:21:36.400 --> 0:21:39.000 coming that is going to have to chase down this 0:21:39.119 --> 0:21:41.080 the patience. The yields are going higher, so we will 0:21:41.119 --> 0:21:44.439 hold off on spending all the fact hundred billion dollars 0:21:44.440 --> 0:21:47.320 of reserves that we have a FED until yield will higher. 0:21:48.040 --> 0:21:51.159 And so you know they didn't spend any of this money. 0:21:51.840 --> 0:21:55.080 Bank of America has been programmatic buying. I guess the 0:21:55.200 --> 0:22:00.080 question from here going forward, is JP Morgan going to 0:22:00.240 --> 0:22:03.639 adapt to a world where and this is this is 0:22:03.680 --> 0:22:06.520 a good segue into into the standing people facility and 0:22:06.600 --> 0:22:09.040 this idea of dealer of last resort. You know in 0:22:09.280 --> 0:22:10.880 my writings and I think I mentioned this one it's 0:22:10.920 --> 0:22:14.800 called too before. JP Morgan was always the lender of 0:22:14.920 --> 0:22:18.439 next to last resorts of the system, right because before 0:22:18.480 --> 0:22:21.080 the FED would stop in, you know, they had always 0:22:21.119 --> 0:22:23.040 the most amount of reserves in the system. So whether 0:22:23.080 --> 0:22:25.200 it was the FX swap market that was acting out 0:22:26.400 --> 0:22:28.879 or the report market, you know, it was JP Morgan 0:22:29.000 --> 0:22:32.840 lending into it. On the margin, there was value. There 0:22:32.920 --> 0:22:34.640 was a lot of value in having all these sex 0:22:34.680 --> 0:22:38.680 as cash because uh, you know, as Warren Buffett would say, 0:22:38.920 --> 0:22:41.399 you know, cash has option value. So if you're a 0:22:41.440 --> 0:22:44.919 bank portfolio, and especially if you're JP Morgan and your 0:22:44.920 --> 0:22:47.399 heart of the financial system, you need to have that 0:22:47.480 --> 0:22:49.200 cash to be able to kind of lend into these 0:22:49.200 --> 0:22:53.840 money markets. Location right now, that opportunity that is extremely poor. 0:22:54.880 --> 0:22:57.440 I mean, the only the only thing, the only thing 0:22:57.480 --> 0:23:00.200 that gets people excited here and turned, which is which 0:23:00.240 --> 0:23:02.640 is just pretty depressing by the way, so all year 0:23:02.680 --> 0:23:04.639 there's nothing to do with the year in turn, you 0:23:04.680 --> 0:23:07.680 have to kind of handicap that. But so that opportunity 0:23:07.880 --> 0:23:11.600 is pool. Fields were supposed to go higher, but they didn't. 0:23:11.680 --> 0:23:14.919 They went lower. You know, we have a taper announcement. 0:23:15.000 --> 0:23:17.120 Fields didn't do anything on the back of that. So 0:23:17.600 --> 0:23:19.520 I think it would be very interesting to see during 0:23:19.560 --> 0:23:23.000 the second half of the year how this posture at 0:23:23.600 --> 0:23:27.280 at this that this bank is going to change going forward, 0:23:27.280 --> 0:23:30.320 because if Fields are not moving higher, they're basically giving 0:23:30.400 --> 0:23:32.840 up a lot of net interest income that other banks 0:23:32.840 --> 0:23:36.600 are earned. And so it was just very interesting. You know, 0:23:36.800 --> 0:23:40.520 there there is this theory out there that bank demand 0:23:40.760 --> 0:23:45.760 for treasuries to satisfy the liquidity requirements has been one 0:23:45.760 --> 0:23:48.800 of the factors, you know, maybe even a very important 0:23:48.800 --> 0:23:53.159 factor in keeping yields very low um And you know, 0:23:53.240 --> 0:23:56.280 this was sort of a mystery in markets um over 0:23:56.320 --> 0:23:59.320 the summer and in the spring, Why our treasury yields 0:23:59.320 --> 0:24:02.000 so low when it looked like the US economy was 0:24:02.000 --> 0:24:05.680 actually recovering. How how big a factor do you think 0:24:05.840 --> 0:24:08.520 bank demand has been when it comes to yields. It's 0:24:08.520 --> 0:24:10.239 not it's not in the numbers. I mean, you just 0:24:10.280 --> 0:24:13.680 don't see. You just don't see any kind of level 0:24:13.760 --> 0:24:18.600 shift in in thanks buying more treasuries. So you know 0:24:18.880 --> 0:24:20.879 they will have the cold reports out in a couple 0:24:20.880 --> 0:24:24.520 of beeks, but but I doubt that there's anything increase 0:24:24.560 --> 0:24:26.800 in bank buying because you noticed from the v P 0:24:26.920 --> 0:24:30.480 a number. So you just just don't see any of that. 0:24:30.560 --> 0:24:32.879 I mean, you know, the one thing I would point 0:24:32.960 --> 0:24:36.240 to is, you know some of the there's two things. 0:24:36.280 --> 0:24:39.399 You know that it's always about clothes and technical so 0:24:39.480 --> 0:24:42.080 to speak. And then there is the narrative. I mean, 0:24:42.320 --> 0:24:44.280 you know, the delta variant get a little out of hand, 0:24:44.640 --> 0:24:47.399 and you know articles about that kind of started to 0:24:47.440 --> 0:24:52.879 percolate proughly when when yields have started to really, so 0:24:52.920 --> 0:24:55.400 I think I think a lot of this is party 0:24:55.600 --> 0:24:59.280 partlet of virus and the delta variant, but also t 0:24:59.440 --> 0:25:01.920 g A moss were coming down, right, So so all 0:25:01.960 --> 0:25:05.280 this cache was coming into the system, and when when 0:25:05.359 --> 0:25:08.040 large amounts of money are coming into the system, there's 0:25:08.080 --> 0:25:11.600 always some leakage because you know, people think about d 0:25:11.720 --> 0:25:13.960 g A comes down, so there's fewer bills. All that 0:25:14.040 --> 0:25:16.760 money goes to RP, yes, most of it, but some 0:25:16.840 --> 0:25:19.479 of it leads and so someone who was in bills 0:25:19.600 --> 0:25:23.120 probably went into an aggregant bond fund and that aggregant 0:25:23.119 --> 0:25:26.000 bond fund had to kind of deployed that money coming in, 0:25:26.080 --> 0:25:28.640 and so there was some bit for for fixed to come. 0:25:28.840 --> 0:25:31.960 So so I think I think it's a combination of 0:25:32.000 --> 0:25:35.240 those two. But it's definitely not been the bank portfolios 0:25:35.320 --> 0:25:39.320 that that caused that caused the really it was certainly 0:25:39.359 --> 0:25:42.240 not uh JP Morgan because they were kind of waiting 0:25:42.280 --> 0:25:44.320 for the others the other things to happen, you know. 0:25:44.400 --> 0:25:49.040 So Okay, well, um let's talk about the standing repo 0:25:49.200 --> 0:25:52.280 facility then. Um, you know, when the FED announced that 0:25:52.480 --> 0:25:56.920 there were a lot of different interpretations over what exactly 0:25:57.040 --> 0:25:59.359 it's meant to be doing so. You know, on the 0:25:59.400 --> 0:26:02.639 one hand, some people were saying it's supposed to prevent 0:26:02.720 --> 0:26:05.680 more blow ups in the repo market. Um. But then 0:26:05.720 --> 0:26:08.160 there were some other people who were saying, it's basically 0:26:08.280 --> 0:26:11.240 paving the way for the end of QUEI and allowing 0:26:11.400 --> 0:26:14.560 the FED to start the taper. So how are you 0:26:14.640 --> 0:26:20.359 viewing it? Yes, so, so the latter one was, you know, 0:26:20.359 --> 0:26:23.440 the view that I that I subscribed to as well, Look, 0:26:23.680 --> 0:26:27.520 we don't need a standing repo now there's so much 0:26:27.520 --> 0:26:29.840 money in the system that we won't need it for 0:26:29.880 --> 0:26:34.680 the next five years in in the aggregate sense, you know. Um, 0:26:34.800 --> 0:26:40.040 so the standing repo facility I think it's going to 0:26:40.119 --> 0:26:43.600 be I would say, we are see the impact. I mean, 0:26:43.720 --> 0:26:47.080 you have to standing people. There's one for three actually, 0:26:47.119 --> 0:26:49.040 if you want to think about its actually one is 0:26:49.080 --> 0:26:55.760 there for the dealers that should be able to replace funding. 0:26:55.800 --> 0:27:01.760 They need to mediate um between the and the cash providers. 0:27:02.280 --> 0:27:04.440 The cash providers blow away from the dealers that is 0:27:04.480 --> 0:27:06.760 going to step in and so the dealers to find 0:27:07.520 --> 0:27:10.800 standing repurposes just the term. But again I tend to 0:27:10.800 --> 0:27:14.080 think about these in terms of types events that have accessed. 0:27:14.119 --> 0:27:16.440 So there's the dealers then there will be the bank 0:27:16.480 --> 0:27:20.879 port folios large and small that can that cannot buy. 0:27:21.000 --> 0:27:23.280 And then you have the FEMA report facility, which is 0:27:23.440 --> 0:27:26.600 which is the same for for foreign central backs. So 0:27:26.640 --> 0:27:30.080 that's that's that's one one BA gold block, so to speak. 0:27:30.400 --> 0:27:32.399 I also want to say the same day that the 0:27:32.440 --> 0:27:36.359 SET announced sending report facility, the G thirty also issued 0:27:36.400 --> 0:27:39.879 a report, part of which was basically recommending that we 0:27:39.960 --> 0:27:42.159 also need a standing group of but we need to 0:27:42.200 --> 0:27:48.159 make this available to anyone who owns treasury collateral. And 0:27:48.240 --> 0:27:51.000 so there was always these two views about who should 0:27:51.080 --> 0:27:53.800 we make who should get access to the standing group, 0:27:54.480 --> 0:27:57.240 and so I always thought, you know, the the the 0:27:57.320 --> 0:28:02.679 issue with opening up for everyone is that, you know, 0:28:02.760 --> 0:28:05.120 it's just it's just a very broad system, right so 0:28:05.720 --> 0:28:07.760 you know, if it's hedge funds to how do you 0:28:07.840 --> 0:28:10.679 draw the line you're letting the little ones and the 0:28:10.720 --> 0:28:14.080 big ones. If it's asset managers, again, how do you 0:28:14.160 --> 0:28:18.360 how do you design the criteria for access and haircuts 0:28:18.359 --> 0:28:21.399 and whatnot, and so so that's cumbersome. Then if you 0:28:21.520 --> 0:28:24.600 think about what the FET did, it's actually it's actually 0:28:24.640 --> 0:28:28.480 a beautiful middle ground because you know the dealers, of 0:28:28.480 --> 0:28:34.040 course they always deal with bank portfolios and foreign central bx. 0:28:34.560 --> 0:28:37.280 What are they? I mean, they are half the by side. 0:28:38.320 --> 0:28:39.880 You know, if you think about the by side from 0:28:39.880 --> 0:28:42.840 the dealer's perspective, you know, it's the insurance companies, it's 0:28:42.880 --> 0:28:46.200 the asset managers, the hedge funds, and the bank portfolio 0:28:46.440 --> 0:28:51.400 and the foreign central banks. So basically two very important actors. 0:28:51.440 --> 0:28:53.880 From from the bias, I've got access to the sustanding 0:28:53.880 --> 0:28:57.840 pople facility, which means that in the next crisis, and 0:28:57.920 --> 0:29:00.520 there will be an ex crisis because there's always are 0:29:00.760 --> 0:29:03.240 that there always are you know, they will be able 0:29:03.280 --> 0:29:08.600 to go to the FED to turn bonds into into liquidity, 0:29:08.760 --> 0:29:11.040 whether you're a foreign center bank or a banquet bo 0:29:11.120 --> 0:29:13.360 you and that's going to be a massive help for 0:29:13.480 --> 0:29:16.400 everyone else in the system because the dealers won't have 0:29:16.480 --> 0:29:18.960 to deal with these accounts because they can go to 0:29:19.040 --> 0:29:21.320 the FED directly, and so everybody else is going to 0:29:21.360 --> 0:29:25.400 have more more balance sheet that um that the dealers 0:29:25.440 --> 0:29:27.880 can that the dealers can provide to them. So this 0:29:28.000 --> 0:29:30.920 is this is how the countours of the next basis 0:29:31.640 --> 0:29:36.080 is going to play out. Observation number one, Observation number two. 0:29:37.040 --> 0:29:40.640 You know why now look I think, I think anyone 0:29:41.080 --> 0:29:44.160 anyone that has because you're a foreign central bank, now 0:29:44.240 --> 0:29:49.760 you need sixty billion dollars less in liquidity because you 0:29:49.760 --> 0:29:52.640 know that the FED will give it to you. So 0:29:52.720 --> 0:29:55.040 if you if you if you think about the typical 0:29:55.040 --> 0:30:00.000 effects manager, it has some liquid assets in money markets, 0:30:00.000 --> 0:30:04.240 has some longer term securities and treasuries of mortgage. That 0:30:04.480 --> 0:30:07.080 that money market did is basically, you know, you just 0:30:07.160 --> 0:30:10.240 leave money on the table because that's your liquidity insurance. 0:30:10.520 --> 0:30:12.680 That's the money that you can spend on short order 0:30:12.680 --> 0:30:16.960 if something unexpected happen. You can now allocate sixty billion 0:30:17.120 --> 0:30:21.360 less UH to those types of instruments because if and 0:30:21.440 --> 0:30:25.120 when that licurity event, the feed is going to be 0:30:25.160 --> 0:30:27.960 able to provide to you that acurity on demand for 0:30:28.000 --> 0:30:31.040 a fixed price. Then you know, these liquidity events always 0:30:31.120 --> 0:30:33.000 less like a week or two weeks or a month 0:30:33.080 --> 0:30:36.640 maybe at most, and then the flows changed. But you know, 0:30:36.760 --> 0:30:39.240 it's a it's a nice it's a nice tool to have, 0:30:40.160 --> 0:30:41.840 and you can also know that you know the fet 0:30:41.920 --> 0:30:44.560 is not going to be opportunistic. You know, if not, 0:30:44.680 --> 0:30:47.160 it might not be the case if you if you 0:30:47.200 --> 0:30:49.320 want to raise the petulity in the market because you 0:30:49.400 --> 0:30:53.680 will be with dealers. Dealers can charge your price. If 0:30:53.680 --> 0:30:56.000 you're doing this, the world can get out. You know, 0:30:56.200 --> 0:30:58.600 it's it's it's not supposed to, but you know people 0:30:58.600 --> 0:31:02.200 always started like calls on accounts read one account is selling. 0:31:02.680 --> 0:31:04.320 I would I would also say that you know, this 0:31:04.720 --> 0:31:07.440 report facility, even though it's going to be more expensive 0:31:07.480 --> 0:31:09.880 than the market, because it's priced a little bit wider 0:31:09.880 --> 0:31:12.959 than the market design, there will be an an an 0:31:12.960 --> 0:31:17.360 limited premium that foreign central banks are are willing to 0:31:17.400 --> 0:31:20.360 pay up for because because they can just raise their 0:31:20.840 --> 0:31:23.760 these they're really anonymous thing. You know, if you remember 0:31:23.880 --> 0:31:28.680 China selling uh you know back sixteen all those treasuries 0:31:28.680 --> 0:31:32.760 and cause some backuping dealer in the increason what threads around. 0:31:33.240 --> 0:31:36.680 I would even say that those episodes probably are going 0:31:36.720 --> 0:31:39.080 to be less painful going forward because you just go 0:31:39.160 --> 0:31:42.120 to the FED and so instead of selling those treasuries 0:31:42.200 --> 0:31:45.280 into spine and stand, get those dollars to your interventions 0:31:45.280 --> 0:31:48.240 in the in the in the in the local currency market. 0:31:48.320 --> 0:31:50.640 So so I think this is this is going to 0:31:50.680 --> 0:31:54.280 smooth things. I would also say since the standing report 0:31:54.320 --> 0:31:58.160 facility was announced, we've had a ten year auction and 0:31:58.200 --> 0:32:01.640 a five year auction that has gone extremely you know, 0:32:01.720 --> 0:32:04.560 well especially the ten uere auction, and we've seen a 0:32:04.640 --> 0:32:08.920 foreign participation at those and at those auctions so which 0:32:08.960 --> 0:32:12.600 was a record participation by foreign official accounts. So so 0:32:12.640 --> 0:32:15.800 I think here's a liquidity tool, and the foreign center 0:32:15.880 --> 0:32:18.840 banks are saying thank you, and they are are underwriting 0:32:19.400 --> 0:32:21.840 the deficits the resultant. You know, if you think about 0:32:22.160 --> 0:32:27.520 five large central banks each allocating sixty billion dollars experts treasuries, 0:32:27.600 --> 0:32:30.360 that's that's three hundred billion dollars, don't know, half a 0:32:30.400 --> 0:32:33.840 taper or something like that. So you know, foreign central banks, 0:32:33.880 --> 0:32:37.800 I think over time they will change their behavior all 0:32:37.880 --> 0:32:41.080 the little less security and lend a little longer to 0:32:41.120 --> 0:32:43.440 the US government because the other arm of the U. 0:32:43.560 --> 0:32:46.440 S Government is going to fund their liquidity. So that's 0:32:46.440 --> 0:32:50.240 that's fun. The bank portfolios to be able to apply 0:32:50.360 --> 0:32:54.680 starting at piver one for for access to this facility, 0:32:54.920 --> 0:32:58.400 and you know, the bank portfolios, I think, I think 0:32:58.480 --> 0:33:01.240 this is not going to be as big a deal 0:33:01.360 --> 0:33:04.800 for for the big banks like Japer, Morgan and Bank 0:33:04.880 --> 0:33:08.400 of America because because they are they are a league 0:33:08.440 --> 0:33:11.760 of their own. But you know, there is twenty thirty 0:33:11.880 --> 0:33:15.200 or so regional banks, smaller banks that also will qualify. 0:33:15.840 --> 0:33:18.680 Then I think it's an overlooked fact that a lot 0:33:18.720 --> 0:33:22.760 of these smaller banks also have a lot of access 0:33:22.800 --> 0:33:26.160 reserves that they accumulated over the past years. Um. I 0:33:26.240 --> 0:33:28.800 think I think that number. Um, I don't have it 0:33:29.080 --> 0:33:30.840 on top of my head, but it's something like four 0:33:31.240 --> 0:33:34.760 billion dollars. They can also spend some of these activity 0:33:35.000 --> 0:33:38.480 on treasury securities and mortgages because they know that, you know, 0:33:38.760 --> 0:33:41.280 the fat is there at twenty five pass points, Chances 0:33:41.360 --> 0:33:44.520 are I will never need that activity, right, So if 0:33:44.560 --> 0:33:46.920 there's a spread in buying treasuries, you should just you 0:33:46.960 --> 0:33:49.480 should just do that. So so so I think this 0:33:49.680 --> 0:33:53.280 is going to move the needle a lot, uh in 0:33:53.520 --> 0:33:58.960 terms of making treasuries collateral in general, more attractive, more 0:33:59.040 --> 0:34:02.120 attractive than cash, which is again if you look at 0:34:02.160 --> 0:34:05.479 the side, guys, that's precisely that's precisely what you need. 0:34:05.640 --> 0:34:09.160 This is this is generating demand. This is generating demand 0:34:09.239 --> 0:34:15.520 for for for treasury securities from two very important buyers. Yeah, 0:34:15.600 --> 0:34:17.520 this is something I wanted to ask you about because 0:34:17.640 --> 0:34:21.240 there was this concern around who will actually buy treasury 0:34:21.280 --> 0:34:26.640 securities and agency mbs. So you know, mortgage bonds issued 0:34:26.680 --> 0:34:29.560 by the g s c s when the FED starts 0:34:29.640 --> 0:34:34.040 to taper QUEI and you're suggesting that it's I guess 0:34:34.040 --> 0:34:37.160 a non issue now because of the standing repot facility. 0:34:37.239 --> 0:34:40.200 Is that right? Yes? I think this is a This 0:34:40.320 --> 0:34:44.000 is the question of who will buy is a very 0:34:44.040 --> 0:34:47.880 important question um in retrospect. Who buys on the margin. 0:34:48.880 --> 0:34:50.800 It's it's always very simple, you know, like but in 0:34:50.920 --> 0:34:53.080 real time and you need to figure out who's going 0:34:53.120 --> 0:34:56.840 to buy in the next Uh. That's what people, you know, confused. 0:34:57.040 --> 0:34:59.719 It's just kind of hard to be But look, if 0:35:00.040 --> 0:35:03.680 we were to tell here's a brief history of of 0:35:03.840 --> 0:35:06.680 rates and funding markets for the past five years, okay, 0:35:07.440 --> 0:35:09.280 and it's you know, we always talked about the marginal 0:35:09.400 --> 0:35:13.000 buyer in this program because you know, like life is 0:35:13.040 --> 0:35:16.120 on the margin. Everything in market margin, So who's the 0:35:16.200 --> 0:35:22.880 marginal buyer? Twenty to twenty seventeen, it was the Asian 0:35:22.920 --> 0:35:27.680 fects hedged buyers that were extremely important and and we're closed. 0:35:27.880 --> 0:35:30.239 So they were buying the treasuries they were sparking and 0:35:30.360 --> 0:35:33.960 for dollars. Europeans were doing the same, and so that 0:35:34.200 --> 0:35:37.120 that that they were the marginal buyers and then the 0:35:37.400 --> 0:35:39.920 prose curency bass blew out and then they you know, 0:35:40.560 --> 0:35:44.280 had their trial by fires there. Demand kind of changed 0:35:44.320 --> 0:35:46.359 a little bit after that. Then you had a bond 0:35:46.400 --> 0:35:49.480 basis that opened up. The set started to creates the 0:35:49.920 --> 0:35:52.719 curve gradually platin so it's it was all the r 0:35:52.760 --> 0:35:56.160 V hedge funds um and they funded everything in the 0:35:56.280 --> 0:36:00.320 repo markets. And then we had that repo market episode 0:36:00.360 --> 0:36:05.320 in September. The FEDS started to rebuild the liquidity buffer 0:36:05.560 --> 0:36:10.560 of the system that build purchases and Lemic came and basically, 0:36:11.160 --> 0:36:13.799 you know that was that was a moment where even 0:36:13.840 --> 0:36:15.880 though you were building up the licurity buffer of the 0:36:15.960 --> 0:36:18.840 system and you were going back to this access reserves regime, 0:36:19.520 --> 0:36:22.880 you didn't do it fast enough, and the pandemic forced 0:36:22.920 --> 0:36:25.839 your hand and basically the feed needed to take out 0:36:25.920 --> 0:36:27.560 all the all the r V hedge funds from these 0:36:27.600 --> 0:36:31.840 bond based positions because they couldn't fund fund these positions. 0:36:32.120 --> 0:36:35.320 And then and then the bank portfolio stepped in and 0:36:35.480 --> 0:36:39.279 they became the dominant buyers of treasury. So this is 0:36:39.360 --> 0:36:42.560 the span of six years. You know, foreign fex hedge 0:36:42.600 --> 0:36:45.360 to counts funding in the FEX bod market, relative value, 0:36:45.360 --> 0:36:49.879 hedge funds funding in the report market. Um. And now 0:36:50.000 --> 0:36:54.480 we have you know, the bank portfolios supported with a 0:36:54.560 --> 0:36:57.440 standing report facility in case there is a need for it, 0:36:58.239 --> 0:37:00.719 and so who is going to buy going forward? I 0:37:00.840 --> 0:37:03.719 think I think the bank portfolios will be a very 0:37:03.800 --> 0:37:07.360 important part of the picture because that's where the excess 0:37:07.440 --> 0:37:12.840 cash is. We we just basically broadened and incentivized slightly 0:37:13.000 --> 0:37:16.320 broader set of banks and foreign central banks to do 0:37:16.440 --> 0:37:19.080 the same that that JP Morgan and Bank of America 0:37:19.160 --> 0:37:22.480 have been doing ever since the beginning of the pandemic. 0:37:22.640 --> 0:37:26.560 So so I think we are we are basically puttering 0:37:26.719 --> 0:37:29.879 up and and appealing to a certain buyer base. That's 0:37:30.280 --> 0:37:33.440 that's that's going to be doing the bidding of the government. 0:37:33.480 --> 0:37:36.040 And also keep in mind, you know, we are also 0:37:36.120 --> 0:37:40.120 in an environment where loan loan demand is very weak 0:37:41.080 --> 0:37:43.919 and a bank needs to land that the bank bank 0:37:44.280 --> 0:37:46.960 has has has capital, and that that needs to be deployed. 0:37:47.000 --> 0:37:52.799 And so I think and another another very important thing 0:37:52.920 --> 0:37:55.920 to keep in mind is that when you think about 0:37:56.160 --> 0:37:58.399 the lending process, you know, a bank makes a loan 0:37:58.520 --> 0:38:01.160 to be it's the past, it's the kind of tradition 0:38:01.239 --> 0:38:04.840 that's the way things supposed to work. I guess that's traditional. 0:38:05.160 --> 0:38:08.200 But the other version of this is a bank pis 0:38:08.200 --> 0:38:11.879 of treasury security and creates a deposit when they when 0:38:11.960 --> 0:38:14.000 they do that, and it's and the and then the 0:38:14.080 --> 0:38:16.400 government is going to spend all that moody. So if 0:38:16.440 --> 0:38:19.120 you think about this infrastructure built, for example, you know, 0:38:19.480 --> 0:38:22.600 normally it's all the private sector building stuff. But when 0:38:22.600 --> 0:38:25.280 the private sector is building stuff, you know, some developer 0:38:25.360 --> 0:38:27.600 goes to a bank. You know, you want to build 0:38:27.680 --> 0:38:29.560 HUDs And Yards, you go to a bank, you take 0:38:29.600 --> 0:38:33.040 out of finances, okay, And so the bank made alone, 0:38:33.320 --> 0:38:36.200 created a deposit, and the developer of Hudson Yards is 0:38:36.239 --> 0:38:38.440 going to spend it to all the contractors. And so 0:38:38.600 --> 0:38:40.880 that's what that looks like on the balance sheet of 0:38:40.920 --> 0:38:44.960 the banking system. If it's the government doing infrastructure projects, 0:38:45.960 --> 0:38:48.080 they will borrow the money and they will send it 0:38:48.160 --> 0:38:51.120 to the little contractors to build whatever. So then all 0:38:51.160 --> 0:38:54.000 of a sudden, it's not loan deposits, but it's treasury 0:38:54.040 --> 0:38:57.960 securities the deposits. And probably we will see a lot 0:38:58.080 --> 0:39:01.480 more of this type of lending going forward than we 0:39:01.600 --> 0:39:03.839 have seen. You know, this pure form of the old 0:39:04.080 --> 0:39:06.400 old type of landing which is all which is all 0:39:06.480 --> 0:39:09.160 loan based, you know, this is this is basically the 0:39:09.280 --> 0:39:12.520 future I think. I think the banks will be buying 0:39:12.520 --> 0:39:15.440 a lot more treasuries and and a lot more mortgage 0:39:15.440 --> 0:39:18.320 backed securities, and the fact that this strip of facility 0:39:18.520 --> 0:39:24.640 is there to help in occasional liquidity hiccups, uh without 0:39:24.680 --> 0:39:26.880 a stigma. I think I think it's going to be 0:39:26.960 --> 0:39:30.960 a huge incentive. It's always about incentives, you know. Again 0:39:31.320 --> 0:39:33.759 in retrospect, it's always simple, as I said, over the 0:39:33.800 --> 0:39:36.719 past five years, were the most important marginal buyers that 0:39:36.800 --> 0:39:40.000 were going forward, it will be the banks, And that 0:39:40.120 --> 0:39:42.040 means that it's also going to be a very stable 0:39:42.120 --> 0:39:44.840 form of funding government because it's all going to be 0:39:44.880 --> 0:40:05.200 sticky deposits. So I'm a little bit concerned, just from 0:40:05.360 --> 0:40:10.360 a a very like self interested financial journalist perspective, that 0:40:10.560 --> 0:40:15.160 you're laying out a financial system that seems quite smooth 0:40:15.480 --> 0:40:19.600 and seems like kind of unlikely to end up in 0:40:19.960 --> 0:40:23.080 a massive blow up that you know, someone like me 0:40:23.280 --> 0:40:27.319 can write lots of articles about um which in some ways, 0:40:27.400 --> 0:40:30.160 you know, money markets and the repo market was always 0:40:30.200 --> 0:40:34.680 supposed to be a boring area of the financial system 0:40:34.760 --> 0:40:38.200 that just worked, but then it exploded in two thousand 0:40:38.200 --> 0:40:40.759 and eight, and then we've had various explosions since then. 0:40:41.840 --> 0:40:45.680 Is there anything interesting coming up in in Repo that 0:40:45.760 --> 0:40:48.719 we should be watching out for, like, you know what 0:40:49.000 --> 0:40:52.000 what should be getting us excited? Because you've described it 0:40:52.080 --> 0:40:59.160 as this beautiful system and very smooth in terms of functioning. Yes, um, well, 0:40:59.200 --> 0:41:02.600 as as I said it, it's quite depressing in my market. Um. 0:41:02.920 --> 0:41:05.360 And you know, just just like you would like to 0:41:05.440 --> 0:41:08.040 write about interesting things. You know, people want to put 0:41:08.080 --> 0:41:11.080 on put on trades about you know, spread though ups 0:41:11.120 --> 0:41:14.880 and whatnot. Um, yes, look you're right. I mean you know, 0:41:15.080 --> 0:41:19.840 the the Dealer of Last Resort was missing from the 0:41:19.920 --> 0:41:24.400 picture institutional, you know, like that's why we had that 0:41:24.480 --> 0:41:28.719 September Time nineteen episode. Um, the spot lines are now 0:41:28.800 --> 0:41:32.640 there standing, people cilities there, and the FET is doing 0:41:32.719 --> 0:41:35.040 this dealer of last Resort thing on both sides of 0:41:35.120 --> 0:41:37.439 its balianship. Right, So the FET is keeping interest rates 0:41:37.520 --> 0:41:41.680 from going too low with the reversaryport facility. It's it's 0:41:41.760 --> 0:41:45.320 keeping reports from gowerring too high. And and you know 0:41:45.400 --> 0:41:48.680 the FX spot market from from from blowing up the 0:41:48.760 --> 0:41:52.200 spot lines and so yes, this is a very this 0:41:52.360 --> 0:41:56.520 is a very stable era of the system. I would 0:41:56.520 --> 0:42:00.040 say that we are we are looking forward to but 0:42:00.239 --> 0:42:02.200 but but I would also say that, you know, this 0:42:02.440 --> 0:42:06.680 was a five year learning process of the FED, right 0:42:06.840 --> 0:42:09.800 because what were the past five years about the past 0:42:09.840 --> 0:42:13.760 five years were about. You know, we had financial reform, 0:42:14.520 --> 0:42:18.279 we had Basil three, bank balance spits are less flexible, 0:42:19.200 --> 0:42:22.880 you know, uh, you know, all all the things that 0:42:22.960 --> 0:42:25.680 happened over the past five years. And so the FED 0:42:25.960 --> 0:42:29.960 was still thinking. I would say that the Great Financial 0:42:30.040 --> 0:42:34.600 Crisis was a it was a one off, and the 0:42:34.680 --> 0:42:37.640 things we had to do then hopefully they will never 0:42:37.719 --> 0:42:40.320 have to do again. And so here we are today 0:42:40.440 --> 0:42:43.000 where some of the things that the set they during 0:42:43.040 --> 0:42:45.440 your Great Financial crisis, some of the things that the 0:42:45.520 --> 0:42:53.000 FED did last March March, they became institutionalized and they 0:42:53.040 --> 0:42:55.480 are now standing facilities. So they are definitely going to 0:42:55.600 --> 0:42:59.840 take the edge off of of a funding markets. And 0:43:00.080 --> 0:43:04.359 so whether this is good or bad, what this means 0:43:04.440 --> 0:43:09.000 is that the frontier is shifting elsewhere because whatever problems 0:43:09.080 --> 0:43:13.120 they will have is probably going to happen and in 0:43:13.600 --> 0:43:18.200 some in some other jurisdiction. But I think dollar funding 0:43:18.239 --> 0:43:23.080 markets are are are are going to be much more stable, 0:43:23.640 --> 0:43:27.440 much more stable going forward. Things will be very quiet 0:43:28.120 --> 0:43:30.320 until we get to a point where the banking system 0:43:30.360 --> 0:43:34.319 again is liability constraints because there's just so much cash 0:43:34.360 --> 0:43:37.360 in the system that you know, the banks you're not 0:43:37.440 --> 0:43:40.520 going to have any problem funding problems to the foreseeable future. 0:43:40.560 --> 0:43:42.960 And you know, as band Bernanke said at the end 0:43:43.120 --> 0:43:47.040 of the first three Qui episodes, you know, the first 0:43:47.080 --> 0:43:50.279 balance is very big, and over time the economy and 0:43:50.320 --> 0:43:52.600 the banking system is going to grow into this big 0:43:52.640 --> 0:43:55.480 balance shot. I think in a similar vein is probably 0:43:55.560 --> 0:43:59.000 going to take a few more in in in treasury 0:43:59.040 --> 0:44:03.760 securities and in a few more trillions. It's before before 0:44:03.800 --> 0:44:07.360 all this access access cash gets get soaked up. But 0:44:07.440 --> 0:44:11.320 again once that, once that type type security environment arrives, 0:44:11.760 --> 0:44:14.319 I think abouts and suspenders around how we are going 0:44:14.360 --> 0:44:17.319 to deal with that types are are indeed just going 0:44:17.440 --> 0:44:22.320 to to make things um less, less spectacular and spread 0:44:22.360 --> 0:44:25.239 the while still be less spectacular than they were. It's 0:44:25.280 --> 0:44:28.320 been benefiting and and and the beginning of the pandemic. 0:44:28.680 --> 0:44:31.080 I think it's an end of an era. Yeah, it 0:44:31.200 --> 0:44:35.200 sounds like a much more boring system awaits us a 0:44:35.280 --> 0:44:40.160 less spectacular system Sulton, it's great having you on as always. 0:44:40.400 --> 0:44:44.080 Thank you so much. Okay, thank thanks for thanks for thanking. 0:44:59.560 --> 0:45:02.640 So i' don't have that much to add to what 0:45:02.760 --> 0:45:06.359 Salton just said, And of course it's always weird doing 0:45:06.440 --> 0:45:09.360 this when I'm basically talking to myself, but I do 0:45:09.560 --> 0:45:12.799 think the end of an era idea is an interesting one, 0:45:12.880 --> 0:45:15.680 and it does feel like we've seen a sort of 0:45:16.600 --> 0:45:20.719 step change in the repo market, given that we now 0:45:20.840 --> 0:45:23.120 have these two facilities. As Alton said, you have the 0:45:23.200 --> 0:45:26.200 reverse repot facility that is putting a floor under rates, 0:45:26.200 --> 0:45:29.160 and then you have the standing facility that's basically putting 0:45:29.560 --> 0:45:33.920 a ceiling on rates, And it just feels like, I 0:45:33.960 --> 0:45:35.560 don't know, the system is going to be much more 0:45:35.600 --> 0:45:39.400 constrained or much more controlled, much more steady going forward. 0:45:39.600 --> 0:45:42.719 So I guess we'll have to wait and see what happens. Um. 0:45:43.160 --> 0:45:45.319 You know, with a new system, there's always the chance 0:45:45.400 --> 0:45:49.799 that you do see new risks develop. Um, So maybe 0:45:49.840 --> 0:45:52.640 there's something out there that no one has seen yet 0:45:52.880 --> 0:45:56.120 and we will get a chance to write something about 0:45:56.160 --> 0:46:00.160 it one day. Okay, this has been another episode of 0:46:00.360 --> 0:46:03.360 the All Thoughts podcast. I'm Tracy Alloway. You can follow 0:46:03.400 --> 0:46:07.560 me on Twitter at Tracy Alloway. Joe isn't here, but 0:46:07.680 --> 0:46:10.719 of course you can follow him on Twitter at The Stalwart. 0:46:11.080 --> 0:46:16.880 You can also follow our producer Laura Carlson at Laura M. Carlson. 0:46:17.520 --> 0:46:21.120 And you can follow Bloomberg's head of podcast Francesco Levi 0:46:21.480 --> 0:46:24.200 at Francesca Today. Thanks for listening.