1 00:00:02,640 --> 00:00:16,640 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 2 00:00:18,800 --> 00:00:22,880 Speaker 2: Hello, and welcome to another episode of the Odd Lots Podcast. 3 00:00:23,000 --> 00:00:26,639 Speaker 2: I'm Jill Wisenthal, and I'm Tracy Alloway. Tracy. Every once 4 00:00:26,720 --> 00:00:29,640 Speaker 2: in a while, and I mostly see this on Twitter, 5 00:00:29,760 --> 00:00:32,040 Speaker 2: if I'm being honest, but every once in a while 6 00:00:32,560 --> 00:00:35,920 Speaker 2: I see people trying to make a big deal about 7 00:00:35,920 --> 00:00:39,640 Speaker 2: like the quarterly refunding announcement by the Treasury. Is if 8 00:00:39,640 --> 00:00:42,159 Speaker 2: it's going to be some like big market mover on 9 00:00:42,240 --> 00:00:44,319 Speaker 2: par with like a FED decision or something like that. 10 00:00:44,640 --> 00:00:47,880 Speaker 3: I like how you say mostly on Twitter, like there's 11 00:00:47,920 --> 00:00:50,280 Speaker 3: even a probability that you would be walking down the 12 00:00:50,320 --> 00:00:53,720 Speaker 3: street and someone's talking about like debt issuing other than 13 00:00:53,760 --> 00:00:56,000 Speaker 3: maybe looking at that debt clock or whatever it is. 14 00:00:56,720 --> 00:00:58,640 Speaker 2: Yes, Like it's not something that comes up at a 15 00:00:58,680 --> 00:01:01,960 Speaker 2: bar specifically, or he I don't hear people talk about 16 00:01:01,960 --> 00:01:04,120 Speaker 2: it on the street. I also do know if it's 17 00:01:04,160 --> 00:01:07,800 Speaker 2: like a real thing that like people in markets actually 18 00:01:07,840 --> 00:01:10,520 Speaker 2: care about, or if it's just sort of this talking 19 00:01:10,600 --> 00:01:14,320 Speaker 2: point pundit sort of quasi political thing. So we are 20 00:01:14,360 --> 00:01:18,600 Speaker 2: recording this August eighth, but in late July, Neurial Rubini 21 00:01:18,640 --> 00:01:22,080 Speaker 2: and Steven Mira put out this paper essentially saying that 22 00:01:22,160 --> 00:01:26,160 Speaker 2: the nature of current issuance, which is that the government 23 00:01:26,240 --> 00:01:28,240 Speaker 2: is borrowing a lot at the short end of the curve. 24 00:01:28,280 --> 00:01:30,640 Speaker 2: I think they called it like this, like stealth quy, 25 00:01:30,840 --> 00:01:33,880 Speaker 2: and maybe insinuated that there were sort of like political 26 00:01:34,160 --> 00:01:37,959 Speaker 2: or specific economic motivations that causing them to issue where 27 00:01:38,000 --> 00:01:40,880 Speaker 2: they do. So there's a lot of like talk about this. 28 00:01:41,240 --> 00:01:44,880 Speaker 3: Yeah, so I am vaguely aware of some of this discussion. 29 00:01:45,080 --> 00:01:49,080 Speaker 3: So the idea here per Robini and Mirren is they're 30 00:01:49,080 --> 00:01:53,520 Speaker 3: calling it activist treasury issuance or ATI. And the idea, 31 00:01:53,600 --> 00:01:56,440 Speaker 3: as you say, is maybe some of the stuff the 32 00:01:56,520 --> 00:02:02,200 Speaker 3: Treasury is doing and specifically choosing to kind of reduce 33 00:02:02,720 --> 00:02:06,480 Speaker 3: the amount of longer term treasuries they've been issuing and 34 00:02:06,720 --> 00:02:10,880 Speaker 3: rely more on shorter term bills. That's something they've done recently. 35 00:02:11,360 --> 00:02:15,360 Speaker 3: The idea is that in so doing, they're essentially mounting 36 00:02:15,440 --> 00:02:20,080 Speaker 3: the stealth QE, easing financial conditions in a politically sensitive 37 00:02:20,639 --> 00:02:24,960 Speaker 3: election year, flattening the old curve to stimulate growth, and 38 00:02:24,960 --> 00:02:28,720 Speaker 3: then ultimately per their calculations. There's a very detailed paper. 39 00:02:29,240 --> 00:02:33,400 Speaker 3: It's worth like one hundred bits in a benchmark interest 40 00:02:33,480 --> 00:02:36,040 Speaker 3: rate cut, but it's being done by the Treasury, which 41 00:02:36,080 --> 00:02:38,160 Speaker 3: is something that you know, the Treasury is supposed to 42 00:02:38,200 --> 00:02:42,240 Speaker 3: be independent to the Federal Reserve. And so there's this 43 00:02:42,320 --> 00:02:47,079 Speaker 3: discussion about like political motivations and conspiracy and things like that, right, 44 00:02:47,200 --> 00:02:47,639 Speaker 3: And it's. 45 00:02:47,520 --> 00:02:51,040 Speaker 2: A very like interesting topic because the question is like, Okay, 46 00:02:51,080 --> 00:02:54,000 Speaker 2: there's some sort of framework that the Treasury uses to 47 00:02:54,000 --> 00:02:55,919 Speaker 2: figure out where and when they're going to issue on 48 00:02:55,960 --> 00:02:58,320 Speaker 2: the various curve, and are they deviating from that in 49 00:02:58,320 --> 00:03:00,799 Speaker 2: some way? And you know, part of the timing here 50 00:03:01,040 --> 00:03:03,400 Speaker 2: is that the FED is currently doing QT right, It's 51 00:03:03,520 --> 00:03:07,359 Speaker 2: letting those longer dated assets roll off the balance sheet, 52 00:03:07,680 --> 00:03:09,320 Speaker 2: and so then the question is like, oh, there's the 53 00:03:09,320 --> 00:03:13,360 Speaker 2: Treasury purposely trying to counteract that. By okay, if the 54 00:03:13,400 --> 00:03:16,760 Speaker 2: Fed is selling long term debt, is Treasury selling less 55 00:03:16,760 --> 00:03:20,320 Speaker 2: long term debt? Muting the impact of monetary policy? All 56 00:03:20,400 --> 00:03:22,920 Speaker 2: kinds of interesting questions. Anyway, we've never really done, I 57 00:03:22,919 --> 00:03:26,920 Speaker 2: don't think, an episode on how governments manage debt and 58 00:03:27,000 --> 00:03:30,320 Speaker 2: think about this challenge, and so it's a very timely 59 00:03:30,480 --> 00:03:33,200 Speaker 2: time to do so and to sort of look at 60 00:03:33,240 --> 00:03:34,200 Speaker 2: what really is going on. 61 00:03:34,480 --> 00:03:37,280 Speaker 3: No, we haven't, and I'm really interested in this topic. 62 00:03:37,440 --> 00:03:39,560 Speaker 3: I know you and I talk about the treasury market, 63 00:03:39,640 --> 00:03:43,480 Speaker 3: but we haven't gotten into those specific decision making processes 64 00:03:43,520 --> 00:03:46,800 Speaker 3: and the rules that maybe govern debt issuance. All I 65 00:03:46,840 --> 00:03:51,640 Speaker 3: know about the treasury is the ultimate financial markets, Karen, 66 00:03:51,760 --> 00:03:55,040 Speaker 3: because every quarter it's out, they're asking for a refund. 67 00:03:56,120 --> 00:03:59,520 Speaker 3: But good one, Tracy, thank you, Thanks Joe. No, I'm 68 00:03:59,520 --> 00:04:00,680 Speaker 3: excited about this conversation. 69 00:04:00,800 --> 00:04:01,280 Speaker 1: Let's do it. 70 00:04:01,360 --> 00:04:03,720 Speaker 2: I'm really excited because again, you know, there's the short 71 00:04:03,800 --> 00:04:07,119 Speaker 2: term question, there's the interaction of issuance in QT, there's 72 00:04:07,200 --> 00:04:10,280 Speaker 2: the election, there's the economic cycle, there's fighting inflation, and 73 00:04:10,320 --> 00:04:12,800 Speaker 2: then we have huge deficits in this country and they're 74 00:04:12,840 --> 00:04:15,160 Speaker 2: going to expect to be bigger and bigger. In February, 75 00:04:15,200 --> 00:04:17,200 Speaker 2: the CBO put out an estimate that there was going 76 00:04:17,240 --> 00:04:20,839 Speaker 2: to be another twenty trillion and accumulated deficits between twenty 77 00:04:20,880 --> 00:04:23,880 Speaker 2: twenty five and twenty thirty four. The estimate will certainly 78 00:04:23,920 --> 00:04:27,000 Speaker 2: be wrong in one direction or another, but there is 79 00:04:27,040 --> 00:04:29,440 Speaker 2: a lot of debt management out there. Anyway. I am 80 00:04:29,480 --> 00:04:32,599 Speaker 2: excited to say, we really do have the perfect guest. 81 00:04:33,000 --> 00:04:35,000 Speaker 2: We're going to be speaking with Amar Raganti. He is 82 00:04:35,040 --> 00:04:39,320 Speaker 2: a fixed income strategist at Wellington Management and Hartford Funds. 83 00:04:39,600 --> 00:04:44,040 Speaker 2: But also importantly he spent four years twenty eleven to 84 00:04:44,080 --> 00:04:47,520 Speaker 2: twenty fifteen in the Office of Debt Management itself. He 85 00:04:47,640 --> 00:04:50,920 Speaker 2: was a debt manager. He made these decisions, understands how 86 00:04:50,920 --> 00:04:54,039 Speaker 2: they're made within the Treasury. So Amara, thank you so 87 00:04:54,120 --> 00:04:56,000 Speaker 2: much for coming on odd lots, Oh, thank you for 88 00:04:56,040 --> 00:04:59,000 Speaker 2: having me totally someone I've really enjoyed talking to a 89 00:04:59,040 --> 00:05:01,279 Speaker 2: meeting for a long time. Thrilled to have you on 90 00:05:01,360 --> 00:05:05,840 Speaker 2: the show. Finally, let's start with like the really big 91 00:05:06,080 --> 00:05:09,520 Speaker 2: question or sort of like maybe a frameworks question. You know, 92 00:05:09,560 --> 00:05:11,520 Speaker 2: when the Fed is thinking about, Okay, we're going to 93 00:05:11,520 --> 00:05:14,839 Speaker 2: issue thirty year treasuries or one month tea bills or whatever. 94 00:05:15,240 --> 00:05:17,720 Speaker 2: You know, there are various factors that might go into that. 95 00:05:18,120 --> 00:05:22,479 Speaker 2: There's demand for the market for duration. There's perhaps a 96 00:05:22,560 --> 00:05:26,600 Speaker 2: desire to minimize total coupon payments over the life of 97 00:05:26,640 --> 00:05:29,200 Speaker 2: the debt. There's other things that go into this question. 98 00:05:29,279 --> 00:05:34,120 Speaker 2: There's an impulse for consistency and reliability in the schedule 99 00:05:34,120 --> 00:05:37,560 Speaker 2: of auctions itself. Talk to us how you would describe 100 00:05:38,120 --> 00:05:41,520 Speaker 2: what the Treasury or the Office of Debt Management is 101 00:05:41,640 --> 00:05:45,560 Speaker 2: solving for when it decides where on the curve to 102 00:05:45,600 --> 00:05:47,360 Speaker 2: issue and how much sure. 103 00:05:47,800 --> 00:05:50,599 Speaker 4: In sort of bold headlines, the Office of Debt Management 104 00:05:50,640 --> 00:05:54,560 Speaker 4: would say its job is to finance the government's deficit 105 00:05:54,839 --> 00:05:58,560 Speaker 4: at the lowest cost for txpayers. The problem, of course, 106 00:05:58,800 --> 00:06:01,480 Speaker 4: is that there there's a lot of things behind that. 107 00:06:01,960 --> 00:06:04,920 Speaker 4: The implications go beyond just sort of what you'd call 108 00:06:04,920 --> 00:06:06,880 Speaker 4: a number that you could scratch down on a piece 109 00:06:06,920 --> 00:06:10,800 Speaker 4: of paper. And then additionally, you know, what you're trying 110 00:06:10,839 --> 00:06:14,200 Speaker 4: to solve for is something that you won't know xanty, 111 00:06:14,400 --> 00:06:17,240 Speaker 4: meaning like you won't know as you're doing it. You 112 00:06:17,360 --> 00:06:21,359 Speaker 4: may know, may know after the fact, because you wouldn't 113 00:06:21,360 --> 00:06:24,360 Speaker 4: have known how you would have changed financial conditions if 114 00:06:24,360 --> 00:06:28,240 Speaker 4: you had done something different. It's sort of loosely like Heisenberg, right, 115 00:06:28,320 --> 00:06:30,440 Speaker 4: like the moment you observe it or act on it, 116 00:06:30,520 --> 00:06:34,240 Speaker 4: you're changing the very nature of the treasury curve and 117 00:06:34,320 --> 00:06:39,040 Speaker 4: importantly the treasury ecosystem. So Treasury and the opposite of 118 00:06:39,040 --> 00:06:42,200 Speaker 4: debt Management are aware of this, this dynamic that the 119 00:06:42,279 --> 00:06:45,200 Speaker 4: fact is is that when they act, they actually change 120 00:06:45,279 --> 00:06:49,880 Speaker 4: the market pricing and microstructure that exists around what's supposed 121 00:06:49,920 --> 00:06:53,120 Speaker 4: to be the world's deepest and most liquid sovereign debt market. 122 00:06:53,600 --> 00:06:57,359 Speaker 4: So they try to actually take what I'd call the 123 00:06:57,400 --> 00:07:01,839 Speaker 4: most boring route they could possibly take, and that is 124 00:07:01,880 --> 00:07:05,440 Speaker 4: something that's called regular and predictable. Now we toss this 125 00:07:05,560 --> 00:07:08,440 Speaker 4: term around a lot. If you've even been ancillary to 126 00:07:08,520 --> 00:07:12,040 Speaker 4: debt management practices, you know, using the words regular and 127 00:07:12,080 --> 00:07:15,960 Speaker 4: predictable is almost like mentioned with like religious reverence. Right. 128 00:07:16,280 --> 00:07:19,080 Speaker 4: The idea is you're there not to surprise the market, 129 00:07:19,400 --> 00:07:22,120 Speaker 4: not to shock it, importantly, not to be a source 130 00:07:22,120 --> 00:07:25,920 Speaker 4: of volatility. And this was pioneered by Paul Volker actually 131 00:07:25,960 --> 00:07:29,360 Speaker 4: in the nineteen seventies to start a regular and predictable practice. 132 00:07:29,960 --> 00:07:33,600 Speaker 4: But regular and predictable is there to accomplish a number 133 00:07:33,680 --> 00:07:38,000 Speaker 4: of things. It's there to make sure that you are 134 00:07:38,360 --> 00:07:41,400 Speaker 4: one not disturbing markets more than they need to be. 135 00:07:41,880 --> 00:07:46,040 Speaker 4: Two by laying out what you're planning to do and 136 00:07:46,240 --> 00:07:49,320 Speaker 4: do it in a very slow and methodical way, you know, 137 00:07:49,400 --> 00:07:53,400 Speaker 4: you are effectively feeding the larger treasury ecosystem. So it's 138 00:07:53,440 --> 00:07:56,200 Speaker 4: not like, oh, the curve is shaped this way or 139 00:07:56,200 --> 00:07:58,960 Speaker 4: it's steeped this way, and we should issue more. Your 140 00:07:59,040 --> 00:08:02,200 Speaker 4: job is to actually look across the entire treasury ecosystem, 141 00:08:02,280 --> 00:08:05,520 Speaker 4: like who are the participants who are involved, and then 142 00:08:05,560 --> 00:08:08,240 Speaker 4: come up with the way of making sure that ecosystem 143 00:08:08,280 --> 00:08:11,960 Speaker 4: remains healthy. It's weirdly more like gardening, or like maintaining 144 00:08:12,000 --> 00:08:14,680 Speaker 4: a natural environment than what you think of like the 145 00:08:14,800 --> 00:08:17,960 Speaker 4: tactical issuance of a normal corporate issuer. 146 00:08:18,280 --> 00:08:21,000 Speaker 3: Gardening is a really nice analogy for it, actually, because 147 00:08:21,000 --> 00:08:23,480 Speaker 3: I don't think I mean, I only started like seriously 148 00:08:23,560 --> 00:08:26,360 Speaker 3: gardening in the past couple of years. And the thing 149 00:08:26,400 --> 00:08:29,240 Speaker 3: about gardening is people will say it's like art, but 150 00:08:29,320 --> 00:08:33,040 Speaker 3: it's art in multi dimensions, right, because you're thinking about time, 151 00:08:33,320 --> 00:08:36,320 Speaker 3: so like what stuff looks like throughout the growing season, 152 00:08:36,400 --> 00:08:39,720 Speaker 3: you're thinking about colors, and then everything is on a 153 00:08:39,800 --> 00:08:42,920 Speaker 3: super long term timeline, so you plant something now and 154 00:08:42,960 --> 00:08:46,560 Speaker 3: you don't really see the impact until a year or so. Okay, wow, 155 00:08:46,640 --> 00:08:49,640 Speaker 3: I just went we used to talk about gardening. No, okay, 156 00:08:49,720 --> 00:08:51,679 Speaker 3: I want to move to a different analogy. So when 157 00:08:51,720 --> 00:08:54,160 Speaker 3: I think about debt issuance, I used to cover corporate 158 00:08:54,160 --> 00:08:56,600 Speaker 3: credit and so I think about, you know, being a 159 00:08:56,640 --> 00:09:00,320 Speaker 3: treasurer at a large multinational like an Apple or a 160 00:09:00,400 --> 00:09:04,360 Speaker 3: Microsoft or whatever, and the decision making process there where 161 00:09:04,720 --> 00:09:07,760 Speaker 3: you know, if I decide there are favorable market conditions, 162 00:09:08,120 --> 00:09:10,120 Speaker 3: I might go out and work with my bankers and 163 00:09:10,160 --> 00:09:14,400 Speaker 3: decide to issue some debt. What is the difference between 164 00:09:15,040 --> 00:09:20,000 Speaker 3: being a treasurer at a big company versus being US Treasury. 165 00:09:19,840 --> 00:09:22,800 Speaker 4: Oh, a vast difference, right, And I too started on 166 00:09:22,880 --> 00:09:25,280 Speaker 4: the other side as a corporate portfolio manager in the 167 00:09:25,280 --> 00:09:28,520 Speaker 4: bond market. You'd look at companies coming to the market 168 00:09:28,720 --> 00:09:31,520 Speaker 4: they either needed cash or as opportunistic. For the US 169 00:09:31,600 --> 00:09:35,320 Speaker 4: government and for the debt management office, it's very different. 170 00:09:35,720 --> 00:09:39,160 Speaker 4: It's that you are always going to be at various 171 00:09:39,200 --> 00:09:42,679 Speaker 4: points on the curve, whether or not at that point. 172 00:09:43,040 --> 00:09:47,520 Speaker 4: It's what i'd call tactically a good thing. And you know, 173 00:09:47,600 --> 00:09:50,520 Speaker 4: this goes into that regular and predictable issue in cycle. 174 00:09:50,800 --> 00:09:52,880 Speaker 4: And the point there, and this is how we get 175 00:09:52,880 --> 00:09:56,040 Speaker 4: to cost, which is again different from how corporates measure cost, 176 00:09:56,520 --> 00:10:00,800 Speaker 4: is that by being consistent, by helping this eco system thrive, 177 00:10:01,240 --> 00:10:05,120 Speaker 4: you're going to create a liquidity premium. Right that because 178 00:10:05,200 --> 00:10:09,080 Speaker 4: there is this regular and predictable nature to your issuance 179 00:10:09,080 --> 00:10:13,280 Speaker 4: cycle that people understand, they're not going to be surprised 180 00:10:13,640 --> 00:10:17,920 Speaker 4: that the availability of securities is going to be well 181 00:10:18,040 --> 00:10:22,120 Speaker 4: calibrated to what the environment needs. And when I meant 182 00:10:22,280 --> 00:10:25,920 Speaker 4: environment or ecosystem, I meant the entire eco. You want 183 00:10:25,960 --> 00:10:31,280 Speaker 4: to service as broad and diversified group of investors as possible, 184 00:10:31,520 --> 00:10:34,640 Speaker 4: and that includes people who will actively short your securities, 185 00:10:34,720 --> 00:10:38,640 Speaker 4: right because that provides a supply outside of auction cycles 186 00:10:38,640 --> 00:10:41,840 Speaker 4: for people to buy and also help stimulate repo markets 187 00:10:41,880 --> 00:10:44,920 Speaker 4: and so on. So you want to be sure that 188 00:10:45,160 --> 00:10:48,280 Speaker 4: you aren't attempting to use pure price on what's on 189 00:10:48,320 --> 00:10:51,160 Speaker 4: the yield curve as a point on why or how 190 00:10:51,160 --> 00:10:53,800 Speaker 4: you should issue. Now I want to be a little careful. 191 00:10:53,840 --> 00:10:59,160 Speaker 4: There is a quantitative framework that Treasury has and it's 192 00:10:59,200 --> 00:11:02,400 Speaker 4: a model that you know, a number of people collaborated on. 193 00:11:02,600 --> 00:11:07,640 Speaker 4: Credit goes to people like Brian Sachs, Reading Ramaswami, Terry Belton, Christossia, 194 00:11:07,720 --> 00:11:11,200 Speaker 4: a number of others who built this model, and it 195 00:11:11,320 --> 00:11:15,560 Speaker 4: sort of gives a sense of okay historically based on 196 00:11:15,600 --> 00:11:19,520 Speaker 4: a number of inputs, whereas Treasury benefited the most by issuing. 197 00:11:20,000 --> 00:11:23,360 Speaker 4: That's like an important guidepost. But the more important part 198 00:11:23,400 --> 00:11:27,360 Speaker 4: is the qualitative feedback that Treasury hears from its dealers, 199 00:11:27,880 --> 00:11:32,520 Speaker 4: from investors, from central bank reserve managers who hold vast 200 00:11:32,520 --> 00:11:35,920 Speaker 4: amounts of treasuries, and that all also feeds in along 201 00:11:35,960 --> 00:11:39,120 Speaker 4: with the borrowing advisory committee into making issuance. 202 00:11:38,679 --> 00:11:42,160 Speaker 2: Decisions right, and then feedback and the needs of various 203 00:11:42,160 --> 00:11:44,599 Speaker 2: investors changes over time. And I mean, of course, in 204 00:11:44,720 --> 00:11:48,679 Speaker 2: extreme periods, you know March twenty twenty, everyone just once 205 00:11:49,000 --> 00:11:51,080 Speaker 2: the most liquid thing in the world, which is the 206 00:11:51,080 --> 00:11:55,000 Speaker 2: shortest end of the curve. Obviously, other times there is 207 00:11:55,080 --> 00:11:58,360 Speaker 2: a tremendous demand for duration and people want to buy 208 00:11:58,360 --> 00:12:00,760 Speaker 2: at the long end. That all changes. Let's just talk 209 00:12:00,840 --> 00:12:03,760 Speaker 2: before we even get to the specific. Now, you know 210 00:12:03,800 --> 00:12:06,720 Speaker 2: you were in this office for years twenty eleven through 211 00:12:06,760 --> 00:12:10,120 Speaker 2: twenty fifteen. What is the quarterly process? I know, there's 212 00:12:10,160 --> 00:12:12,840 Speaker 2: like a survey that goes out, they look at the curve, 213 00:12:13,000 --> 00:12:16,120 Speaker 2: et cetera. There's the estimates for how much is going 214 00:12:16,160 --> 00:12:18,640 Speaker 2: to need to be financed in that quarterback. Can you 215 00:12:18,760 --> 00:12:22,000 Speaker 2: walk us through the quarterly process that leads up to 216 00:12:22,040 --> 00:12:24,280 Speaker 2: the announcement of this is the new auction schedule. 217 00:12:24,520 --> 00:12:27,679 Speaker 4: Yeah, there's a number of pieces to it. One is 218 00:12:28,120 --> 00:12:30,599 Speaker 4: within Treasury, there's a separate office called the Office of 219 00:12:30,600 --> 00:12:33,800 Speaker 4: Fiscal Projections, and their job is to sort of project 220 00:12:33,840 --> 00:12:37,360 Speaker 4: out what the upcoming cash needs over a given quarter 221 00:12:37,400 --> 00:12:40,920 Speaker 4: are likely to be. And once you know the debt 222 00:12:40,920 --> 00:12:44,040 Speaker 4: managers have that information, they can start thinking about, you know, 223 00:12:44,080 --> 00:12:48,600 Speaker 4: the various allocations among their regular securities. But obviously there's 224 00:12:48,720 --> 00:12:51,960 Speaker 4: issues that they want to receive feedback on, so there'll 225 00:12:52,000 --> 00:12:55,480 Speaker 4: be a primary dealer survey which could address things like 226 00:12:55,520 --> 00:12:59,560 Speaker 4: the composition of issuance, changes to issuance, or even other 227 00:12:59,600 --> 00:13:03,439 Speaker 4: things like new products, issuance points, regulatory events that are 228 00:13:03,480 --> 00:13:06,720 Speaker 4: impacting the demand for treasuries. So that goes out several 229 00:13:06,720 --> 00:13:10,320 Speaker 4: weeks before the quarterly refunding process. Treasury then comes to 230 00:13:10,400 --> 00:13:13,760 Speaker 4: New York and meets with a subset of these primary 231 00:13:13,760 --> 00:13:18,120 Speaker 4: dealers at the FRBN Y and then Garner's feedback and 232 00:13:18,120 --> 00:13:20,840 Speaker 4: has sort of very candid back and forths with questions 233 00:13:21,320 --> 00:13:24,120 Speaker 4: and here's feedback on what the issuance process has been 234 00:13:24,160 --> 00:13:26,800 Speaker 4: thus far, really to kind of sample what's on the 235 00:13:26,840 --> 00:13:31,079 Speaker 4: primary dealer's minds at that given point. Following that, when 236 00:13:31,080 --> 00:13:34,400 Speaker 4: they're back in DC, they begin the process of preparing 237 00:13:34,480 --> 00:13:39,000 Speaker 4: their presentation to the Borrowing Advisory Committee. And already, you know, 238 00:13:39,080 --> 00:13:43,959 Speaker 4: several months before, they've assigned what's called charges to individual 239 00:13:44,000 --> 00:13:47,439 Speaker 4: members of the Borrowing Advisory Committee. And these charges are 240 00:13:47,480 --> 00:13:51,840 Speaker 4: specific questions the Treasury would like answered with the expertise 241 00:13:51,920 --> 00:13:54,720 Speaker 4: and help of the Borrowing Advisory Committee. This could be 242 00:13:54,840 --> 00:13:57,960 Speaker 4: things like blue sky ideas of what else should we 243 00:13:58,000 --> 00:14:01,559 Speaker 4: be issuing, or is there some impact likely to come 244 00:14:01,600 --> 00:14:04,000 Speaker 4: on markets because of a change in regulations. It could 245 00:14:04,120 --> 00:14:08,040 Speaker 4: span the gamut right. Treasury doesn't ask these questions casually. 246 00:14:08,320 --> 00:14:11,240 Speaker 4: It doesn't mean they're going to act on recommendations, but 247 00:14:11,280 --> 00:14:13,719 Speaker 4: it gives a sense of what's on the Office of 248 00:14:13,760 --> 00:14:17,440 Speaker 4: Debt Management's mind. Treasury will then meet with the tea back. 249 00:14:17,880 --> 00:14:20,960 Speaker 4: They'll hear the presentation of the various charges present to 250 00:14:21,000 --> 00:14:23,480 Speaker 4: the tea back, and then later on that day the 251 00:14:23,560 --> 00:14:26,440 Speaker 4: tea BAC will present to the Secretary or the senior 252 00:14:26,480 --> 00:14:29,800 Speaker 4: most Treasury official available, and then on that following day 253 00:14:29,880 --> 00:14:33,240 Speaker 4: there'll be a release of the broadest amount of information. 254 00:14:33,520 --> 00:14:36,680 Speaker 4: There's a release that morning as well, but over those 255 00:14:36,680 --> 00:14:40,080 Speaker 4: two days there's the release of the presentations, the minutes, 256 00:14:40,280 --> 00:14:43,000 Speaker 4: the data packs, and that is the sort of signal 257 00:14:43,040 --> 00:14:45,560 Speaker 4: to market on what issuance is likely to be. And 258 00:14:45,560 --> 00:14:48,880 Speaker 4: there's a press conference that goes with this. And what's funny, 259 00:14:49,200 --> 00:14:51,640 Speaker 4: as you guys have mentioned, is if you watch a 260 00:14:51,680 --> 00:14:54,920 Speaker 4: Federal Reserve press conference and watch how tightly packed that 261 00:14:55,040 --> 00:14:57,760 Speaker 4: room is then you go to a Treasury quarter refunding 262 00:14:57,800 --> 00:15:01,800 Speaker 4: press conference, see how finley staffed day. 263 00:15:02,240 --> 00:15:04,280 Speaker 2: I could actually get into one of those, because I'm 264 00:15:04,280 --> 00:15:06,480 Speaker 2: probably I'm never going to get into a FED press conference, 265 00:15:06,520 --> 00:15:07,800 Speaker 2: but we could probably get into that. 266 00:15:08,000 --> 00:15:11,280 Speaker 4: But and this is not deliberate, but it's there to 267 00:15:11,480 --> 00:15:24,840 Speaker 4: be boring. 268 00:15:27,600 --> 00:15:30,480 Speaker 3: Why don't we bring it up to date with the 269 00:15:30,520 --> 00:15:34,640 Speaker 3: most recent events and like specific decisions that have been made, 270 00:15:34,680 --> 00:15:37,640 Speaker 3: because maybe that will help us understand the decision making 271 00:15:37,640 --> 00:15:41,920 Speaker 3: framework that you just outlined. But this whole discussion has 272 00:15:42,040 --> 00:15:45,560 Speaker 3: kicked off because despite the fact that the US government 273 00:15:45,640 --> 00:15:49,640 Speaker 3: has a massive deficit, the US Treasury has said that 274 00:15:49,800 --> 00:15:54,360 Speaker 3: it is sort of tempering the increase in its issuance 275 00:15:54,480 --> 00:15:57,920 Speaker 3: of longer dated securities, So it's sort of backing away 276 00:15:57,960 --> 00:16:00,440 Speaker 3: from it. I think in the most recent quarterly funding 277 00:16:00,520 --> 00:16:02,960 Speaker 3: announcement they said they were going to keep the issuance 278 00:16:03,040 --> 00:16:05,440 Speaker 3: of longer term debt basically unchanged. 279 00:16:05,640 --> 00:16:08,120 Speaker 2: Also, Tracy, just to add on to that, we haven't 280 00:16:08,160 --> 00:16:11,240 Speaker 2: inverted yield curve. So theoretically, if you wanted to borrow 281 00:16:11,320 --> 00:16:13,080 Speaker 2: at the look, you know, one could say, oh, look, 282 00:16:13,120 --> 00:16:14,760 Speaker 2: it's cheaper to borrow at the long end. Why are 283 00:16:14,760 --> 00:16:17,440 Speaker 2: you selling all these bills when actually the cheapness is 284 00:16:17,480 --> 00:16:17,920 Speaker 2: at the end. 285 00:16:18,000 --> 00:16:21,560 Speaker 3: So this is the very essence of the current controversy. Ye, 286 00:16:21,760 --> 00:16:24,360 Speaker 3: what is happening And I know you're not a treasury now, 287 00:16:24,440 --> 00:16:26,920 Speaker 3: but what is happening when the Treasury comes out with 288 00:16:27,080 --> 00:16:28,120 Speaker 3: that kind of decision? 289 00:16:28,360 --> 00:16:31,040 Speaker 4: Okay, So the first kind of framework you want to 290 00:16:31,040 --> 00:16:33,240 Speaker 4: think about is, and you would ask this initially, is 291 00:16:33,280 --> 00:16:37,320 Speaker 4: how do they make these directional issuance decisions? Well, the 292 00:16:37,320 --> 00:16:39,800 Speaker 4: first kind of thing is that Treasury does look at 293 00:16:39,840 --> 00:16:43,000 Speaker 4: long term averages of where it is in its weighted 294 00:16:43,040 --> 00:16:46,240 Speaker 4: average maturity, Right like, when you add all these securities together, 295 00:16:46,400 --> 00:16:49,480 Speaker 4: what's sort of the average maturity, And historically it's been 296 00:16:49,520 --> 00:16:52,440 Speaker 4: around sixty sixty one months. Treasury is well above that. 297 00:16:52,680 --> 00:16:55,400 Speaker 4: Right now it's around seventy one months, so it's actually 298 00:16:55,520 --> 00:16:58,400 Speaker 4: pretty pretty high up. The second thing, which. 299 00:16:58,360 --> 00:17:00,320 Speaker 3: Just to be clear, most people would say that's a 300 00:17:00,360 --> 00:17:02,200 Speaker 3: good thing, right you want to term out your debt. 301 00:17:02,280 --> 00:17:04,600 Speaker 4: Maybe if you're a corporate treasurer you might want to 302 00:17:04,640 --> 00:17:07,960 Speaker 4: do that, but there's a lot of arguments that you 303 00:17:08,000 --> 00:17:09,800 Speaker 4: actually don't want to turn out your debt. 304 00:17:09,880 --> 00:17:11,280 Speaker 3: Oh interesting, okay. 305 00:17:11,040 --> 00:17:14,879 Speaker 4: So yeah, the first is is that, yes, the curve 306 00:17:14,960 --> 00:17:18,920 Speaker 4: is inverted. That's if you decided to move issuance that way, 307 00:17:19,359 --> 00:17:22,160 Speaker 4: chances are you could uninvert the curve. I'm not saying 308 00:17:22,200 --> 00:17:24,760 Speaker 4: that's a definitive. It depends on how much or how 309 00:17:24,920 --> 00:17:27,560 Speaker 4: likely you know what else is happening in markets. The 310 00:17:27,640 --> 00:17:30,320 Speaker 4: second thing is is that as in a previous episode, 311 00:17:30,359 --> 00:17:32,399 Speaker 4: I thought Josh Junger explained it really well. You know, 312 00:17:32,440 --> 00:17:34,919 Speaker 4: you could roll these three month bills you know, all 313 00:17:34,960 --> 00:17:37,000 Speaker 4: the way out to ten years, or you could issue 314 00:17:37,000 --> 00:17:39,240 Speaker 4: a ten year and if you're sort of risk neutral, 315 00:17:39,560 --> 00:17:42,200 Speaker 4: there's no savings, right or there's no gain or savings. 316 00:17:42,320 --> 00:17:45,760 Speaker 4: It just means that forwards get realized, and effectively, it's 317 00:17:45,800 --> 00:17:50,520 Speaker 4: effectively the same thing. So when Treasury does that, you're 318 00:17:50,760 --> 00:17:55,000 Speaker 4: saying that over time, you're effectively making a tactical rates 319 00:17:55,080 --> 00:17:59,359 Speaker 4: call that somehow that you think that ten year rates 320 00:17:59,440 --> 00:18:02,679 Speaker 4: or thirty year oss won't go substantially lower. That's the 321 00:18:02,720 --> 00:18:06,240 Speaker 4: first thing. The second thing is is that the sheer 322 00:18:06,280 --> 00:18:08,359 Speaker 4: amount that you can put on the ten and thirty 323 00:18:08,440 --> 00:18:10,720 Speaker 4: year is going to be less than what you can 324 00:18:10,760 --> 00:18:13,920 Speaker 4: put in the bills market. Now, that's just absent anything 325 00:18:13,960 --> 00:18:16,960 Speaker 4: that the Federal Reserve is doing. That's just generally true, right, 326 00:18:17,040 --> 00:18:19,040 Speaker 4: Like it's just a broader and bigger it tends to 327 00:18:19,080 --> 00:18:20,080 Speaker 4: be a broader and bigger. 328 00:18:19,920 --> 00:18:23,120 Speaker 3: Shorter there's more demand for shorter dated securities. 329 00:18:23,200 --> 00:18:25,919 Speaker 4: But the third thing is is that what Treasury really 330 00:18:26,040 --> 00:18:28,600 Speaker 4: is trying to do is look around across the ecosystem 331 00:18:28,640 --> 00:18:32,000 Speaker 4: and say, hey, where should we be feeding securities to 332 00:18:32,160 --> 00:18:34,560 Speaker 4: over time? If we are kind of taking a risk 333 00:18:34,640 --> 00:18:37,040 Speaker 4: neutral sort of approach to this, right that we're not 334 00:18:37,200 --> 00:18:38,880 Speaker 4: extrapolating what forward curves. 335 00:18:38,640 --> 00:18:39,119 Speaker 2: Are going to be. 336 00:18:39,440 --> 00:18:43,520 Speaker 4: We don't know any more than a typical rate strategist 337 00:18:43,640 --> 00:18:46,640 Speaker 4: or someone we know what we don't know about how 338 00:18:46,720 --> 00:18:50,520 Speaker 4: market rates evolve over time. So because of that, our 339 00:18:50,640 --> 00:18:54,240 Speaker 4: job is to help issue securities to where the biggest 340 00:18:54,240 --> 00:18:57,920 Speaker 4: pools of capital are because that's how you issue risk 341 00:18:57,960 --> 00:19:00,840 Speaker 4: free securities and keep up the health and demand for 342 00:19:01,240 --> 00:19:05,200 Speaker 4: and liquidity of your asset class. So the biggest pool 343 00:19:05,200 --> 00:19:08,680 Speaker 4: of money now, in particular, is still at the front end. Right. 344 00:19:08,720 --> 00:19:11,800 Speaker 4: The amount of reserves that have been created is really dramatic. 345 00:19:12,359 --> 00:19:16,400 Speaker 4: Now the pushback to this is, well, hey, the Federal 346 00:19:16,440 --> 00:19:19,679 Speaker 4: Reserve created all these reserves, and now you're sort of 347 00:19:19,720 --> 00:19:24,040 Speaker 4: taking advantage of this and you're issuing there Now, as 348 00:19:24,040 --> 00:19:27,240 Speaker 4: I might have mentioned before the show, every decade, this 349 00:19:27,359 --> 00:19:30,600 Speaker 4: criticism sort of gets leveled at Treasury that to some 350 00:19:30,680 --> 00:19:35,160 Speaker 4: degree you are standing in the way of monetary policy. 351 00:19:35,560 --> 00:19:38,159 Speaker 4: Back in twenty eleven and twelve, it was a very 352 00:19:38,160 --> 00:19:40,280 Speaker 4: different set of people who had a critique. It was 353 00:19:40,600 --> 00:19:44,639 Speaker 4: Larry Summers, Josh Rudolph sam Hansen, David Greenlaw who'd said 354 00:19:44,880 --> 00:19:48,639 Speaker 4: Treasury was extending its long term issuance and extending the 355 00:19:48,680 --> 00:19:52,160 Speaker 4: maturity the weighted average maturity of its debt while QE 356 00:19:52,400 --> 00:19:55,440 Speaker 4: was going on, and it said, you know, the FED 357 00:19:55,560 --> 00:19:58,520 Speaker 4: is buying long term securities and you're issuing long term securities. 358 00:19:58,840 --> 00:20:01,199 Speaker 4: You're getting in the way of the Fed. And just 359 00:20:01,400 --> 00:20:03,560 Speaker 4: the flip side of the critique is now, which is 360 00:20:03,920 --> 00:20:06,800 Speaker 4: that the FED wants to tighten financial conditions, and by 361 00:20:06,920 --> 00:20:11,400 Speaker 4: issuing shorter day to debt, you're not allowing financial conditions 362 00:20:11,400 --> 00:20:12,520 Speaker 4: to tighten as much as this. 363 00:20:13,000 --> 00:20:16,000 Speaker 3: The criticism back then was that they were potentially steepening 364 00:20:16,280 --> 00:20:18,960 Speaker 3: the curve, whereas now people are like, oh, they're flattening 365 00:20:18,960 --> 00:20:20,040 Speaker 3: the curve to stimulate growth. 366 00:20:20,160 --> 00:20:23,720 Speaker 4: Yeah, to some degree, that's right, And Treasury's answer is 367 00:20:23,840 --> 00:20:27,919 Speaker 4: usually remarkably consistent. We're announcing what we're doing well in 368 00:20:27,960 --> 00:20:30,679 Speaker 4: advance of what we're going to do. If the Federal 369 00:20:30,760 --> 00:20:34,400 Speaker 4: Reserve thinks this is inappropriate for monetary policy, it can 370 00:20:34,560 --> 00:20:38,600 Speaker 4: absolutely take steps to do more. So the pushback in 371 00:20:38,680 --> 00:20:41,320 Speaker 4: eleven and twelve or twelve and thirteen, I think was 372 00:20:42,240 --> 00:20:45,200 Speaker 4: the Fed can buy more, right, Like, the Treasury is 373 00:20:45,200 --> 00:20:47,800 Speaker 4: going to issue what it needs to issue for its 374 00:20:47,840 --> 00:20:50,760 Speaker 4: financing needs in any given year or quarter. But the 375 00:20:50,800 --> 00:20:52,880 Speaker 4: Fed's trying to take duration out of the market back then, 376 00:20:53,040 --> 00:20:55,480 Speaker 4: and the Treasury is issuing duration, the Fed has the 377 00:20:55,560 --> 00:20:57,040 Speaker 4: flexibility and freedom. 378 00:20:56,720 --> 00:20:57,200 Speaker 2: To do more. 379 00:20:57,760 --> 00:21:00,400 Speaker 4: The flip side here is if the Fed thought term 380 00:21:00,440 --> 00:21:04,320 Speaker 4: premia wasn't enough or the curve wasn't steep enough, the 381 00:21:04,400 --> 00:21:07,800 Speaker 4: Fed has tools where it can steep in the curve. 382 00:21:08,080 --> 00:21:11,919 Speaker 4: It could outright sell securities from the SOMA portfolio and 383 00:21:12,000 --> 00:21:14,679 Speaker 4: steep in the curve. What Treasury is really trying to 384 00:21:14,680 --> 00:21:17,160 Speaker 4: do is it's almost like you walk into a room, right, 385 00:21:17,640 --> 00:21:20,680 Speaker 4: and you move a large piece of furniture. You move 386 00:21:20,720 --> 00:21:23,359 Speaker 4: around the piece of furniture like that furniture is not 387 00:21:23,400 --> 00:21:26,120 Speaker 4: going to be moving dynamically, right, It's sort of set 388 00:21:26,160 --> 00:21:29,320 Speaker 4: in its place. And the FED, as a central bank 389 00:21:29,560 --> 00:21:33,000 Speaker 4: with multiple tools at hand can move around it, not 390 00:21:33,040 --> 00:21:36,600 Speaker 4: saying rather easily. It complicates the job. But the whole 391 00:21:36,640 --> 00:21:39,359 Speaker 4: point of regular and predictable is not just to signal 392 00:21:39,400 --> 00:21:42,280 Speaker 4: to markets participants, but also to signal back to the 393 00:21:42,320 --> 00:21:44,440 Speaker 4: central Bank that this is what's happening. 394 00:21:44,600 --> 00:21:48,440 Speaker 3: Joe, this is my second favorite topic, which is interior decorating. Oh, 395 00:21:49,160 --> 00:21:50,320 Speaker 3: you just talk about gardening. 396 00:21:50,440 --> 00:21:54,520 Speaker 2: Can talk about this on the HGTV channel in the discord. 397 00:21:54,680 --> 00:21:57,080 Speaker 2: Maybe we'll talk about it there. So this is actually 398 00:21:57,160 --> 00:22:01,280 Speaker 2: really interesting because if the auction schedule is laid out 399 00:22:01,280 --> 00:22:04,800 Speaker 2: in advance, if it's regular, et cetera, you can actually 400 00:22:04,800 --> 00:22:07,800 Speaker 2: sort of test the proposition whether the Treasury is being 401 00:22:07,840 --> 00:22:11,320 Speaker 2: activist by how quickly it changes. It sounds like in 402 00:22:11,359 --> 00:22:16,080 Speaker 2: the Fed his total freedom and total institutional acceptance of 403 00:22:16,119 --> 00:22:19,440 Speaker 2: the idea of agility, and that we expect it of them. 404 00:22:20,000 --> 00:22:23,040 Speaker 2: But if the Treasury were being activist in some way, 405 00:22:23,840 --> 00:22:26,040 Speaker 2: that would be weird because we would see it very 406 00:22:26,160 --> 00:22:29,200 Speaker 2: explicitly in a changing nature of auction. 407 00:22:29,440 --> 00:22:32,239 Speaker 4: Sure, And in fact, in the paper you reference that 408 00:22:32,320 --> 00:22:34,399 Speaker 4: came out, the place that was pointed to was in 409 00:22:34,600 --> 00:22:37,080 Speaker 4: Q three Q four of last year, when in the 410 00:22:37,119 --> 00:22:41,320 Speaker 4: August refunding Treasury had said we plan to increase coupon sizes, 411 00:22:41,880 --> 00:22:43,719 Speaker 4: and there was a lot of noise around this, and 412 00:22:43,760 --> 00:22:46,200 Speaker 4: you could see really yields really sort of steepen out. 413 00:22:46,600 --> 00:22:49,640 Speaker 4: And then in the November refunding, Treasury was like, yeah, 414 00:22:49,680 --> 00:22:51,800 Speaker 4: we're increasing coupon sizes, but it's not going to be 415 00:22:51,960 --> 00:22:55,359 Speaker 4: that much, and really yields slammed back down, and in 416 00:22:55,359 --> 00:22:58,160 Speaker 4: fact we're well below those levels now. So it kind 417 00:22:58,200 --> 00:23:00,439 Speaker 4: of behooves the point on whether or not you know 418 00:23:00,520 --> 00:23:02,399 Speaker 4: that actually made a difference or not. 419 00:23:02,840 --> 00:23:06,080 Speaker 2: So let's get more to the right now. I actually 420 00:23:06,119 --> 00:23:08,760 Speaker 2: don't remember their numbers, Like, so the one that you 421 00:23:08,880 --> 00:23:13,159 Speaker 2: said that average maturity currently for all outstanding that is 422 00:23:13,160 --> 00:23:17,600 Speaker 2: actually on the long side, so seventy one, just to 423 00:23:17,600 --> 00:23:20,000 Speaker 2: get back to the sixty month and the average has 424 00:23:20,000 --> 00:23:22,439 Speaker 2: been historically about sixty months sixty one, Yeah, okay, so 425 00:23:22,560 --> 00:23:26,480 Speaker 2: just to get back to average would argue for actually 426 00:23:26,600 --> 00:23:28,959 Speaker 2: doing what the treasure is doing, which is issuing more 427 00:23:28,960 --> 00:23:30,760 Speaker 2: at the short end of the curve. But why don't 428 00:23:30,760 --> 00:23:32,920 Speaker 2: you talk to us about like what is the sort 429 00:23:32,920 --> 00:23:36,960 Speaker 2: of split right now? And then more importantly, what are 430 00:23:37,160 --> 00:23:41,720 Speaker 2: the overall market context, whether it's demand for duration, whether 431 00:23:41,760 --> 00:23:45,600 Speaker 2: it's something about market microstructure, whether it's whatever is going 432 00:23:45,640 --> 00:23:49,359 Speaker 2: on that sort of tell the Treasury go shorter. 433 00:23:49,680 --> 00:23:52,280 Speaker 4: Yeah. So one, it's trying to think about what your 434 00:23:52,320 --> 00:23:54,840 Speaker 4: long term averages has been and just sort of recalibrating 435 00:23:54,880 --> 00:23:57,360 Speaker 4: a little bit over time. It's not a this is important, 436 00:23:57,400 --> 00:23:59,520 Speaker 4: it's not a hard role. You don't need to do it. 437 00:23:59,800 --> 00:24:02,199 Speaker 4: You also can look at things like the ratio of 438 00:24:02,240 --> 00:24:06,680 Speaker 4: bills to coupon's outstanding. Again not a hard rule. So 439 00:24:07,080 --> 00:24:10,160 Speaker 4: one of the sort of controversial things was that Treasury 440 00:24:10,440 --> 00:24:12,880 Speaker 4: had typically given guidance saying we like to keep bill 441 00:24:12,920 --> 00:24:16,520 Speaker 4: issuance around twenty outstanding about twenty percent, or issuance around 442 00:24:16,520 --> 00:24:19,639 Speaker 4: twenty percent of the total issue in size. Where we 443 00:24:19,680 --> 00:24:22,320 Speaker 4: are now, we're like a few percentage points above, right, 444 00:24:22,840 --> 00:24:27,480 Speaker 4: And this has caused among some academics some consternation. But again, 445 00:24:27,600 --> 00:24:30,320 Speaker 4: if you go to the eighties, it was thirty five percent, right, Like, 446 00:24:30,640 --> 00:24:34,960 Speaker 4: it's fluctuated over time as issuance needs have taken place. 447 00:24:35,040 --> 00:24:37,880 Speaker 4: And then as well as where are the largest sort 448 00:24:37,920 --> 00:24:40,920 Speaker 4: of pools of money. Now, if you're going to issue 449 00:24:40,960 --> 00:24:44,679 Speaker 4: into this environment with where you're trying not to cause 450 00:24:44,760 --> 00:24:48,800 Speaker 4: lots of volatility, it would mean shortening right now. If 451 00:24:48,880 --> 00:24:52,119 Speaker 4: there was an extraordinary demand for duration that was going on, 452 00:24:52,440 --> 00:24:55,280 Speaker 4: there's no reason you need to shorten your wham. You 453 00:24:55,320 --> 00:24:57,399 Speaker 4: could keep it at where it's at, you could keep 454 00:24:57,440 --> 00:25:01,040 Speaker 4: it constant, you could increase it a little bit. For example, 455 00:25:01,200 --> 00:25:03,760 Speaker 4: has gone substantially higher in terms of the way to 456 00:25:03,800 --> 00:25:05,960 Speaker 4: average maturity. I think at times it's been at like 457 00:25:06,080 --> 00:25:09,159 Speaker 4: ninety months. So the point is is that you're not 458 00:25:09,280 --> 00:25:12,560 Speaker 4: constrained by any of these what i'd call like rules. 459 00:25:12,960 --> 00:25:17,119 Speaker 4: It's to really read the market microstructure. Post Dot Frank, 460 00:25:17,320 --> 00:25:21,080 Speaker 4: for example, Treasury understood that there'd be a really substantial 461 00:25:21,160 --> 00:25:24,560 Speaker 4: need for a lot of short term, stable value collateral. 462 00:25:24,800 --> 00:25:27,880 Speaker 4: People had to post margin for derivatives right they had 463 00:25:27,920 --> 00:25:31,520 Speaker 4: to keep effectively more cash like things on hand, and 464 00:25:31,600 --> 00:25:34,280 Speaker 4: Treasury reacted to that. It created the floating rate note 465 00:25:34,480 --> 00:25:37,840 Speaker 4: as an example of something like that. The reason why 466 00:25:37,880 --> 00:25:39,879 Speaker 4: the fifty year and one hundred year bond don't exist 467 00:25:40,000 --> 00:25:43,840 Speaker 4: right now is that Treasury sees the market microstructure and 468 00:25:43,960 --> 00:25:46,760 Speaker 4: doesn't think there's going to be regular and predictable demand 469 00:25:46,760 --> 00:25:50,040 Speaker 4: at those levels. So every time that debate has come up, 470 00:25:50,080 --> 00:25:52,399 Speaker 4: every time a new secretary comes in and thinks that 471 00:25:52,440 --> 00:25:54,840 Speaker 4: they want to do something like that, they usually have 472 00:25:55,040 --> 00:25:57,400 Speaker 4: not have to. They walk it back because staff shows 473 00:25:57,440 --> 00:25:58,840 Speaker 4: them like the analysis. 474 00:26:00,119 --> 00:26:04,440 Speaker 3: Okay, so you mentioned te back before the Treasury Borrowing 475 00:26:04,480 --> 00:26:08,600 Speaker 3: Advisory Committee, which is like a representative group of market 476 00:26:08,640 --> 00:26:12,960 Speaker 3: participants that advise the Treasury on things that the Treasury 477 00:26:13,000 --> 00:26:15,320 Speaker 3: asked them to look at. And one of the things 478 00:26:15,359 --> 00:26:18,199 Speaker 3: that Treasury has asked them to look at recently is 479 00:26:18,400 --> 00:26:22,520 Speaker 3: the strategy for tea bills. And some people are interpreting 480 00:26:22,560 --> 00:26:24,919 Speaker 3: this as like a sort of direct response to the 481 00:26:24,960 --> 00:26:28,400 Speaker 3: ATI criticism, where like, well, let's ask the market participants 482 00:26:28,440 --> 00:26:30,879 Speaker 3: if they think this is some big conspiracy, or if 483 00:26:30,920 --> 00:26:33,520 Speaker 3: it matters or what the shape of tea bills should be. 484 00:26:34,440 --> 00:26:36,920 Speaker 3: What does it mean that t back is like looking 485 00:26:37,000 --> 00:26:37,320 Speaker 3: at this. 486 00:26:37,680 --> 00:26:40,160 Speaker 4: Yeah, they will often use the charges as a way 487 00:26:40,200 --> 00:26:43,879 Speaker 4: of responding to criticism, and to be fair, they actually 488 00:26:43,960 --> 00:26:45,880 Speaker 4: want a sort of what I'd call a deep dive 489 00:26:45,920 --> 00:26:48,840 Speaker 4: into that. They want to know are they inadvertently doing 490 00:26:48,880 --> 00:26:53,600 Speaker 4: something that is causing consternation among market participants that's upsetting 491 00:26:53,680 --> 00:26:57,280 Speaker 4: the sort of carefully laid out Treasury ecosystem. And that's 492 00:26:57,320 --> 00:27:00,320 Speaker 4: exactly the type of feedback that they want, I think, 493 00:27:00,440 --> 00:27:02,480 Speaker 4: where they you know, you could take a little umbrage 494 00:27:02,480 --> 00:27:05,080 Speaker 4: at was this idea of activist issuance and some type 495 00:27:05,119 --> 00:27:08,399 Speaker 4: of political push, because this is usually one of the 496 00:27:08,400 --> 00:27:12,960 Speaker 4: most technocratic places within Treasury. The secretary generally has a 497 00:27:13,000 --> 00:27:16,359 Speaker 4: lot of other things on his or her mind, everything 498 00:27:16,359 --> 00:27:20,320 Speaker 4: from counter terrorism to the international affair side, which is 499 00:27:20,320 --> 00:27:23,800 Speaker 4: financial diplomacy and debt management is an important piece, but 500 00:27:23,920 --> 00:27:26,440 Speaker 4: it is a piece of that, and you typically rely 501 00:27:26,600 --> 00:27:29,679 Speaker 4: on your Assistant Secretary for Financial Markets to really be 502 00:27:29,760 --> 00:27:32,520 Speaker 4: that point person to handle that part of issuance. 503 00:27:32,840 --> 00:27:35,800 Speaker 2: Yeah, I noticed that when you described a quarterly process 504 00:27:35,840 --> 00:27:38,800 Speaker 2: for auction schedules, there was no point in which the 505 00:27:38,840 --> 00:27:41,239 Speaker 2: Treasury Secretary walks in and say, hey, guys, it's an 506 00:27:41,240 --> 00:28:00,000 Speaker 2: election here, we need to do this. Just yesterday, August seventh, 507 00:28:00,200 --> 00:28:03,440 Speaker 2: Great Bloomberg story, Steve Mnuchen says it's time to kill 508 00:28:03,480 --> 00:28:06,840 Speaker 2: the new treasury bond he created. So he revived auctions 509 00:28:06,880 --> 00:28:10,040 Speaker 2: of a twenty year bond, and apparently there's not much 510 00:28:10,080 --> 00:28:12,120 Speaker 2: demand for it. Yield is higher than ten year, yield 511 00:28:12,160 --> 00:28:15,280 Speaker 2: is higher than thirty year. First of all, what causes it? Why? 512 00:28:15,320 --> 00:28:17,840 Speaker 2: What is it about market structure and treasury that would 513 00:28:17,880 --> 00:28:21,760 Speaker 2: cause something like a twenty year treasury to become orphaned 514 00:28:21,880 --> 00:28:22,080 Speaker 2: like that. 515 00:28:22,560 --> 00:28:25,879 Speaker 4: Yeah, well, first, you know, just a little bit of pushback. Yes, 516 00:28:26,000 --> 00:28:28,240 Speaker 4: it's traded above the thirty year, but you know, in 517 00:28:28,320 --> 00:28:31,200 Speaker 4: recent months that spread has actually collapsed, per okay, but 518 00:28:31,800 --> 00:28:33,760 Speaker 4: it's still above the thirty year, and that's a fair point. 519 00:28:34,520 --> 00:28:36,919 Speaker 4: There can be any number of things. The demand for 520 00:28:37,119 --> 00:28:40,120 Speaker 4: a particular treasury or particular treasury security or a point 521 00:28:40,120 --> 00:28:42,720 Speaker 4: on the curve is influenced by a whole lot of 522 00:28:42,760 --> 00:28:46,080 Speaker 4: other things. So for example, you know, why is the 523 00:28:46,120 --> 00:28:50,320 Speaker 4: thirty year in such demand. Well, one market participants already 524 00:28:50,360 --> 00:28:54,000 Speaker 4: you know, incorporated o their portfolios. Private sector issuers use 525 00:28:54,040 --> 00:28:57,040 Speaker 4: it as a benchmarking security for their own issuance. So 526 00:28:57,480 --> 00:29:01,240 Speaker 4: in a new issuance period for corporates, what you often do, 527 00:29:01,480 --> 00:29:04,600 Speaker 4: if you're an IGPM is you'll take delivery of the 528 00:29:05,080 --> 00:29:07,960 Speaker 4: new private sector bond by you know, so and so company, 529 00:29:08,120 --> 00:29:10,800 Speaker 4: and then you'll sell your thirty year treasury or you'll 530 00:29:10,800 --> 00:29:13,000 Speaker 4: short that point in the curve, and that's how you're 531 00:29:13,000 --> 00:29:17,760 Speaker 4: capturing the spread. That's a very normal occurrence, and that dynamic, 532 00:29:18,280 --> 00:29:20,959 Speaker 4: you know, needs to build up at different points on 533 00:29:21,000 --> 00:29:24,640 Speaker 4: the curve, and some points it's just not as useful. 534 00:29:24,880 --> 00:29:28,760 Speaker 4: So it's very possible that the end demand, whether it's 535 00:29:29,120 --> 00:29:33,400 Speaker 4: usage a benchmark security, whether you know, liability driven investors 536 00:29:33,440 --> 00:29:37,160 Speaker 4: like pension funds that seek to immunize interstrate risk don't 537 00:29:37,200 --> 00:29:40,360 Speaker 4: find it that useful, whether stripping activity around it is 538 00:29:40,440 --> 00:29:43,960 Speaker 4: very limited. All of these things play into the overall 539 00:29:44,080 --> 00:29:48,000 Speaker 4: demand for the security. Now, Treasury does its best ahead 540 00:29:48,040 --> 00:29:49,920 Speaker 4: of time to try to figure out whether that's going 541 00:29:49,960 --> 00:29:52,280 Speaker 4: to be the case or not. It's had challenges of 542 00:29:52,320 --> 00:29:55,160 Speaker 4: the twenty year and as it happened in the early 543 00:29:55,240 --> 00:29:58,280 Speaker 4: nineteen eighties, when the twenty year program was canceled in 544 00:29:58,360 --> 00:30:01,240 Speaker 4: nineteen eighty six, it too, you know, showed a humped 545 00:30:01,240 --> 00:30:04,200 Speaker 4: curve where the twenty year traded cheap to the thirty 546 00:30:04,280 --> 00:30:08,200 Speaker 4: year point. So yeah, it's certainly not been a resounding success. 547 00:30:08,280 --> 00:30:11,239 Speaker 4: It's also only been four years, and that's not a 548 00:30:11,280 --> 00:30:14,640 Speaker 4: particularly long time from the perspective of a debt manager. 549 00:30:14,960 --> 00:30:17,480 Speaker 2: Yeah, just to that point, Tracy, it sounds like a 550 00:30:17,480 --> 00:30:20,360 Speaker 2: lot of this is just sort of path dependency. Like 551 00:30:20,400 --> 00:30:23,440 Speaker 2: if everyone's been doing thirty years and that's where you're 552 00:30:23,520 --> 00:30:26,480 Speaker 2: used to benchmarking, then it could have been twenty years 553 00:30:26,520 --> 00:30:28,440 Speaker 2: to begin with. But if it wasn't then it wasn't. 554 00:30:28,480 --> 00:30:30,200 Speaker 4: Well, I was just gonna say, that's where the gardening 555 00:30:30,200 --> 00:30:33,840 Speaker 4: analogy is interesting. Right, You've tilled and planted and kept 556 00:30:33,880 --> 00:30:37,640 Speaker 4: like this one area really sort of well nourished, and 557 00:30:37,680 --> 00:30:39,280 Speaker 4: then you're trying to do it in an area that 558 00:30:39,400 --> 00:30:42,480 Speaker 4: hasn't been there. It takes more time, and chances are 559 00:30:42,560 --> 00:30:44,480 Speaker 4: it's probably not as fruitful. Immediately. 560 00:30:44,720 --> 00:30:47,000 Speaker 3: Thank you so much for coming back to gardening. I 561 00:30:47,080 --> 00:30:47,720 Speaker 3: appreciate it. 562 00:30:47,960 --> 00:30:50,320 Speaker 4: Yeah, I'll get grief for this, I think so. 563 00:30:50,920 --> 00:30:54,440 Speaker 3: Joe mentioned the news story yesterday and the other thing 564 00:30:54,480 --> 00:30:57,560 Speaker 3: that happened yesterday. Again, we are recording this on August eighth. 565 00:30:57,600 --> 00:31:01,200 Speaker 3: It has been an absolutely torrid, we very dramatic week 566 00:31:01,280 --> 00:31:05,520 Speaker 3: in markets, but we had a treasury auction that was 567 00:31:05,960 --> 00:31:10,479 Speaker 3: pretty weak. I think was the consensus. What constitutes a 568 00:31:10,640 --> 00:31:14,880 Speaker 3: bad day for someone working in treasury, Like, what can 569 00:31:14,960 --> 00:31:15,560 Speaker 3: go wrong? 570 00:31:15,680 --> 00:31:16,200 Speaker 2: Good question? 571 00:31:16,720 --> 00:31:19,480 Speaker 4: Oh wow, A lot of things can sometimes go wrong. 572 00:31:20,120 --> 00:31:22,280 Speaker 4: So you know, it was a three basis point tail 573 00:31:22,320 --> 00:31:24,800 Speaker 4: on the ten year auction. That's actually not like, that's 574 00:31:24,840 --> 00:31:25,200 Speaker 4: not great. 575 00:31:25,360 --> 00:31:27,440 Speaker 3: It's not a disaster. But I think most people they're 576 00:31:27,480 --> 00:31:28,720 Speaker 3: already nervous and they see it. 577 00:31:28,760 --> 00:31:31,680 Speaker 4: But given the rally, you had in rate markets. You know, 578 00:31:31,840 --> 00:31:34,480 Speaker 4: it's effectively saying at these levels there might be a 579 00:31:34,520 --> 00:31:37,160 Speaker 4: little bit of reduced demand and the levels need to 580 00:31:37,160 --> 00:31:39,600 Speaker 4: back up a bit. So this isn't something that would 581 00:31:39,640 --> 00:31:42,440 Speaker 4: cause anyone to particularly blink. If you remember around the 582 00:31:42,440 --> 00:31:47,960 Speaker 4: Taper tantrum, that was a period of serious consternation because 583 00:31:48,160 --> 00:31:50,840 Speaker 4: you were starting to see real weakness and tails in 584 00:31:51,400 --> 00:31:55,600 Speaker 4: a series of auctions, and the fence communications around that time, 585 00:31:56,000 --> 00:32:00,120 Speaker 4: whether deliberate or not deliberate, we're injecting substantial amount of volatility. 586 00:32:00,520 --> 00:32:04,760 Speaker 4: So for individuals approaching auctions, price discovery of what things 587 00:32:04,760 --> 00:32:08,680 Speaker 4: should settle at was becoming very, very, very challenged. So 588 00:32:08,760 --> 00:32:12,680 Speaker 4: that particular time was one where we were watching how 589 00:32:12,680 --> 00:32:15,400 Speaker 4: these auctions were tailing. The more tails you have, the 590 00:32:15,480 --> 00:32:19,440 Speaker 4: less efficient. By definition, your auctions are right like, you're 591 00:32:19,440 --> 00:32:22,680 Speaker 4: gonna get them periodically. But if they're consistently tailing, or 592 00:32:22,880 --> 00:32:26,480 Speaker 4: the flip side, if they're consistently coming through substantially through 593 00:32:26,520 --> 00:32:30,719 Speaker 4: the when issue market, you're again saying that price discovery 594 00:32:30,800 --> 00:32:34,600 Speaker 4: is being challenged and it's not being transparent. So those 595 00:32:34,600 --> 00:32:37,400 Speaker 4: are periods Treasury starts trying to figure out what's going 596 00:32:37,440 --> 00:32:40,680 Speaker 4: on among the investor community. Is at external events, its exogynous. 597 00:32:41,120 --> 00:32:41,320 Speaker 3: You know. 598 00:32:41,400 --> 00:32:45,640 Speaker 4: Obviously the summer of eleven during the first downgrade, which 599 00:32:45,680 --> 00:32:49,720 Speaker 4: is the first summer I started, and that office was 600 00:32:50,000 --> 00:32:50,360 Speaker 4: that's like. 601 00:32:50,360 --> 00:32:53,360 Speaker 3: Joe and I starting financial journalism in two thousand and eight, 602 00:32:53,400 --> 00:32:54,880 Speaker 3: Like August two thousand and eight. 603 00:32:55,000 --> 00:32:57,440 Speaker 4: That was a bad day, right, Like that was a 604 00:32:57,480 --> 00:33:01,280 Speaker 4: bad summer for all intents and purposes. And oddly enough 605 00:33:01,320 --> 00:33:04,440 Speaker 4: it actually didn't impact treasury demand one way or the other. 606 00:33:04,920 --> 00:33:09,520 Speaker 4: Rates ended up actually rallying. But to treasury officials, it 607 00:33:09,720 --> 00:33:14,560 Speaker 4: was the reputation and the pristineness of the treasury market 608 00:33:14,720 --> 00:33:17,520 Speaker 4: that had been scratched be smirched, right, and they felt 609 00:33:17,600 --> 00:33:20,920 Speaker 4: somewhat unfairly at that point. That was obviously a bad 610 00:33:20,960 --> 00:33:24,560 Speaker 4: day anytime around. Debt ceilings are bad days. Anytime you 611 00:33:24,640 --> 00:33:27,880 Speaker 4: question the full faith and credit, those are bad days. 612 00:33:28,320 --> 00:33:32,040 Speaker 4: Almost everything else. It means that, hey, you need to 613 00:33:32,080 --> 00:33:34,720 Speaker 4: do a lot more work on thinking about are you 614 00:33:34,800 --> 00:33:37,760 Speaker 4: really optimizing issuance for the lay of the land. 615 00:33:38,720 --> 00:33:42,680 Speaker 2: What causes structural demand for duration to change over time? 616 00:33:42,760 --> 00:33:45,160 Speaker 2: I mean, I guess there's just sort of the economic cycle. 617 00:33:45,360 --> 00:33:47,880 Speaker 2: And you know, again we understand what happened in March 618 00:33:47,920 --> 00:33:50,520 Speaker 2: twenty twenty give me the most liquid thing in the world. 619 00:33:50,840 --> 00:33:53,200 Speaker 2: But when you sort of like think a little bit longer, 620 00:33:53,280 --> 00:33:56,360 Speaker 2: are there ways that people on markets or economists or 621 00:33:56,360 --> 00:34:00,400 Speaker 2: whoever else try to project demand for duration? Why is 622 00:34:00,440 --> 00:34:03,240 Speaker 2: there a particular and why now is there like people 623 00:34:03,320 --> 00:34:04,120 Speaker 2: want the short end? 624 00:34:04,560 --> 00:34:07,880 Speaker 4: Yeah, I think many have tried to come up with 625 00:34:07,920 --> 00:34:11,040 Speaker 4: what i'd call a long term demand framework for duration. 626 00:34:11,640 --> 00:34:15,000 Speaker 4: I don't think anything has been particularly sound. You could 627 00:34:15,080 --> 00:34:19,439 Speaker 4: argue demographics, but that's unclear. It probably has a lot 628 00:34:19,480 --> 00:34:22,520 Speaker 4: more to do with policy rates and expectations around policy 629 00:34:22,600 --> 00:34:26,160 Speaker 4: rates and growth and inflation. That tells you how willing 630 00:34:26,640 --> 00:34:29,719 Speaker 4: people are to go out on the curve, and as 631 00:34:29,719 --> 00:34:32,440 Speaker 4: well as like volatility, right, because the further you go 632 00:34:32,440 --> 00:34:34,319 Speaker 4: out in the curve, there's more money at risk on 633 00:34:34,360 --> 00:34:37,960 Speaker 4: a per basis point a movement. So you could say 634 00:34:38,280 --> 00:34:42,080 Speaker 4: in a narrow space, it's expectations of growth inflation as 635 00:34:42,080 --> 00:34:46,239 Speaker 4: well as expectations of volatility like that would likely be 636 00:34:46,640 --> 00:34:50,000 Speaker 4: the key driver for demand for duration. But there's a 637 00:34:50,080 --> 00:34:54,280 Speaker 4: nuance to this. Are we talking funded or unfunded duration? Right? 638 00:34:54,440 --> 00:34:57,279 Speaker 4: So if I look at like the treasury curve, and 639 00:34:57,320 --> 00:34:59,640 Speaker 4: then I look at like the swaps market, well, the 640 00:34:59,640 --> 00:35:03,760 Speaker 4: swap markets trade through the treasury, you have negative swap spreads, 641 00:35:04,200 --> 00:35:07,920 Speaker 4: so you could say synthetically, the swaps market is the 642 00:35:07,960 --> 00:35:11,080 Speaker 4: market for unfunded duration right where you don't have to 643 00:35:11,080 --> 00:35:15,600 Speaker 4: put as many dollars to work to get similar duration characteristics. 644 00:35:16,080 --> 00:35:20,879 Speaker 4: And if you converted longer term treasuries into swaps, these 645 00:35:20,880 --> 00:35:24,120 Speaker 4: would be sofur plus instruments. And that's weird, Like this 646 00:35:24,239 --> 00:35:27,120 Speaker 4: dynamics existed for a long time, but it's a strange 647 00:35:27,160 --> 00:35:32,560 Speaker 4: dynamic because why would your risk free government security trade 648 00:35:32,560 --> 00:35:35,640 Speaker 4: it so for plus not so for minus when you 649 00:35:35,640 --> 00:35:37,960 Speaker 4: get out to the longer part of the curve. And 650 00:35:38,000 --> 00:35:40,640 Speaker 4: the answer is is that there's balance sheet charges to 651 00:35:41,040 --> 00:35:44,280 Speaker 4: putting that much money to work. Is one, So that impacts, 652 00:35:44,360 --> 00:35:47,240 Speaker 4: you know, sort of the demand and differential between funded 653 00:35:47,239 --> 00:35:51,200 Speaker 4: and unfunded duration. The second is are there other things 654 00:35:51,200 --> 00:35:56,359 Speaker 4: you'd rather do with your cash versus go buy treasuries, 655 00:35:56,680 --> 00:35:59,160 Speaker 4: but yet you still need the duration. And this is 656 00:35:59,239 --> 00:36:02,040 Speaker 4: the advent of the whole, the differential between futures and 657 00:36:02,080 --> 00:36:05,880 Speaker 4: cash treasuries and the treasury basis trade. And it's typically 658 00:36:05,920 --> 00:36:09,239 Speaker 4: that there's investment managers who want to own credit, long 659 00:36:09,320 --> 00:36:14,240 Speaker 4: duration credit, but want to manage their duration synthetically via futures, 660 00:36:14,640 --> 00:36:18,360 Speaker 4: and that also causes that. And Stephen Kelly at Yale 661 00:36:18,400 --> 00:36:21,640 Speaker 4: has written, you know, pretty authoritatively on this, and that 662 00:36:21,680 --> 00:36:24,080 Speaker 4: could also be a signal for treasury. And it's a 663 00:36:24,160 --> 00:36:26,920 Speaker 4: counterfactual to like a lot of the criticism out there 664 00:36:27,200 --> 00:36:29,120 Speaker 4: of how could you say you should be issuing a 665 00:36:29,160 --> 00:36:32,400 Speaker 4: lot more longer dated bonds when possibly the true price 666 00:36:32,440 --> 00:36:35,799 Speaker 4: of duration is already telling you that the bonds you're 667 00:36:35,800 --> 00:36:37,720 Speaker 4: issuing are not coming at the cheapest cost. 668 00:36:37,960 --> 00:36:40,080 Speaker 3: Yeah, this is something that I think gets lost in 669 00:36:40,080 --> 00:36:42,759 Speaker 3: the conversation sometimes, which is like treasuries are not the 670 00:36:42,800 --> 00:36:46,480 Speaker 3: only source of duration. And I'm about to throw in 671 00:36:46,520 --> 00:36:50,799 Speaker 3: my third favorite topic, which is cooking. But like, if 672 00:36:50,800 --> 00:36:54,240 Speaker 3: you are a fund manager, you're trying to like bake. 673 00:36:55,000 --> 00:36:57,600 Speaker 3: This is a labored analogy. You're trying to bake like 674 00:36:58,080 --> 00:37:02,240 Speaker 3: a yield and duration, right, And like often the general 675 00:37:02,360 --> 00:37:05,480 Speaker 3: recipe or the guidance that you're following is like you're 676 00:37:05,480 --> 00:37:09,200 Speaker 3: trying to match and hopefully outperform some sort of benchmark, 677 00:37:09,719 --> 00:37:12,759 Speaker 3: and there's like a degree of duration embedded in the benchmark. 678 00:37:13,000 --> 00:37:16,160 Speaker 3: And I remember at various points in time, specifically I 679 00:37:16,200 --> 00:37:19,080 Speaker 3: think it was twenty fifteen, like there was an argument 680 00:37:19,200 --> 00:37:22,560 Speaker 3: that like the FED was sucking up too much duration 681 00:37:22,719 --> 00:37:26,080 Speaker 3: from the market because it was buying not treasuries but 682 00:37:26,200 --> 00:37:29,960 Speaker 3: mortgage bond securities, and so no one could match like 683 00:37:30,280 --> 00:37:35,040 Speaker 3: the hypothetical benchmark index. And so anyway, it's just a point, 684 00:37:35,200 --> 00:37:37,920 Speaker 3: just an excuse for me to talk about baking. 685 00:37:38,600 --> 00:37:40,480 Speaker 4: I mean, it could have just been a common complaint. 686 00:37:40,520 --> 00:37:43,280 Speaker 4: Normally the benchmark providers try to take out the securities 687 00:37:43,280 --> 00:37:45,600 Speaker 4: owned by the FED, but there could have been operational 688 00:37:45,640 --> 00:37:48,520 Speaker 4: issues in actually sourcing the cash duration that you need. 689 00:37:49,040 --> 00:37:51,960 Speaker 4: So like, this is a real issue. And I try 690 00:37:51,960 --> 00:37:54,480 Speaker 4: to think of this as there is no one lens 691 00:37:54,520 --> 00:37:58,120 Speaker 4: that you look at lowest cost. Yeah right, there's multiple lenses. 692 00:37:58,560 --> 00:38:01,719 Speaker 4: And what Treasury actually steps back and says, if we 693 00:38:01,800 --> 00:38:04,759 Speaker 4: keep doing like the job we're doing of trying to 694 00:38:04,800 --> 00:38:09,600 Speaker 4: maintain a liquid ecosystem, will earn a liquidity premium over time, 695 00:38:09,680 --> 00:38:13,800 Speaker 4: over years, over decades, versus, hey, we have a short 696 00:38:13,800 --> 00:38:15,879 Speaker 4: wham or we have a long wham. And every time 697 00:38:15,920 --> 00:38:18,520 Speaker 4: that experiment's really been done where they pick a wham 698 00:38:18,560 --> 00:38:21,000 Speaker 4: purely for cost, it's not ended that. 699 00:38:21,080 --> 00:38:24,960 Speaker 2: Well, Amara Ganzi, thank you so much for coming on 700 00:38:25,000 --> 00:38:28,000 Speaker 2: odd Lots. That was a really fantastic and cleared up 701 00:38:28,040 --> 00:38:28,560 Speaker 2: a lot for me. 702 00:38:28,719 --> 00:38:31,040 Speaker 3: That was really fun. This is like an all time 703 00:38:31,120 --> 00:38:34,520 Speaker 3: favorite episode of mine, given that we talked about gardening, 704 00:38:34,719 --> 00:38:39,320 Speaker 3: interior design, cooking, and debt management. That's great. 705 00:38:39,520 --> 00:38:40,200 Speaker 4: Well, thank you for. 706 00:38:40,160 --> 00:38:56,080 Speaker 2: Having me, Tracy. I really like that conversation. I'll just 707 00:38:56,120 --> 00:38:59,160 Speaker 2: start with one sort of big picture thought, which is 708 00:38:59,480 --> 00:39:02,080 Speaker 2: I really I think this is an important point that 709 00:39:02,239 --> 00:39:05,560 Speaker 2: he made, which is that even if you're just trying 710 00:39:05,600 --> 00:39:10,000 Speaker 2: to solve for the absolute minimum interest payments over time, 711 00:39:10,520 --> 00:39:15,880 Speaker 2: that that doesn't necessarily say you should always sell at 712 00:39:15,920 --> 00:39:19,000 Speaker 2: the cheapest part of the curve because of the importance 713 00:39:19,440 --> 00:39:21,960 Speaker 2: of that healthy ecosystem, which is a long term thing. 714 00:39:22,239 --> 00:39:26,000 Speaker 3: Yeah. I've got three takeaways from that conversation, which was 715 00:39:26,120 --> 00:39:29,040 Speaker 3: very fun. But number one ties into what you just said. 716 00:39:29,080 --> 00:39:32,960 Speaker 3: So this idea that a government is different to corporate. Yeah, 717 00:39:33,080 --> 00:39:35,600 Speaker 3: and if you are a company, you're probably trying to 718 00:39:35,600 --> 00:39:38,640 Speaker 3: turn out your debt at the lowest possible cost, and 719 00:39:38,840 --> 00:39:41,440 Speaker 3: to some extent, the government will be trying to reduce 720 00:39:41,520 --> 00:39:45,000 Speaker 3: interest expenses. But on the other hand, it has to 721 00:39:45,040 --> 00:39:48,120 Speaker 3: take into consideration the entirety of the curve and the 722 00:39:48,160 --> 00:39:52,799 Speaker 3: fact that it is actually providing a benchmark for other borrowers. Yes, 723 00:39:52,920 --> 00:39:56,799 Speaker 3: And then the second takeaway is that reflexivity point, So 724 00:39:56,880 --> 00:40:00,200 Speaker 3: the idea that as soon as you start issuing something, 725 00:40:00,480 --> 00:40:03,040 Speaker 3: you can have an impact on the curve itself. And 726 00:40:03,080 --> 00:40:05,520 Speaker 3: so the goal for the Treasury is really to be 727 00:40:05,600 --> 00:40:09,480 Speaker 3: as risk neutral as possible, as Amar was saying. And 728 00:40:09,520 --> 00:40:12,040 Speaker 3: then I guess the third thing that was really interesting 729 00:40:12,080 --> 00:40:15,520 Speaker 3: to me was the relationship between the Treasury and monetary 730 00:40:15,520 --> 00:40:18,600 Speaker 3: policy or the central Bank, and this idea that like, Okay, 731 00:40:19,160 --> 00:40:23,480 Speaker 3: maybe treasury issuance could have an impact on financial conditions, 732 00:40:23,520 --> 00:40:26,440 Speaker 3: but it's not like the FED is helpless here, and 733 00:40:26,520 --> 00:40:29,120 Speaker 3: the FED has other tools that it could use to 734 00:40:29,280 --> 00:40:31,120 Speaker 3: offset changes in the curve. 735 00:40:31,320 --> 00:40:34,120 Speaker 2: Totally, I thought that was a really excellent and useful point. 736 00:40:34,160 --> 00:40:37,880 Speaker 2: It's like, yes, okay, there are in this sense that 737 00:40:38,000 --> 00:40:40,959 Speaker 2: there are times when the Treasury is issuing in such 738 00:40:40,960 --> 00:40:43,680 Speaker 2: a manner that could be cross purposes with the FED. 739 00:40:44,200 --> 00:40:47,120 Speaker 2: But the question of whether it's like activist or has 740 00:40:47,160 --> 00:40:50,600 Speaker 2: some sort of motives. One way to test that is like, 741 00:40:50,960 --> 00:40:53,359 Speaker 2: is it still being done in a sort of predictable 742 00:40:54,160 --> 00:40:57,400 Speaker 2: manner that was laid out in advance, right, And so 743 00:40:57,560 --> 00:41:01,760 Speaker 2: we want a FED that reacts very quickly to market 744 00:41:01,840 --> 00:41:04,960 Speaker 2: data and changing conditions and all that, And so we 745 00:41:05,080 --> 00:41:08,080 Speaker 2: give the Fed a broad leeway to sort of change 746 00:41:08,120 --> 00:41:11,040 Speaker 2: its mind whatever it wants. And that's part of the 747 00:41:11,080 --> 00:41:15,240 Speaker 2: institutional arrangement. If we started seeing that from the Treasury, 748 00:41:15,280 --> 00:41:18,920 Speaker 2: where it's suddenly, you know, dramatically changing the auction schedule 749 00:41:18,920 --> 00:41:24,080 Speaker 2: from one quarter to another or inter quarter emergency, you know, 750 00:41:23,560 --> 00:41:26,880 Speaker 2: I guess that could be a thing that sort of 751 00:41:26,920 --> 00:41:29,400 Speaker 2: would be the test of like whether it's like activist 752 00:41:29,520 --> 00:41:29,719 Speaker 2: or not. 753 00:41:30,280 --> 00:41:33,040 Speaker 3: Joe, can I say one thing please? I'm waiting to 754 00:41:33,120 --> 00:41:36,200 Speaker 3: the very end of this conversation to say this because 755 00:41:36,239 --> 00:41:40,200 Speaker 3: hopefully no one will hear it. But if you think about, 756 00:41:40,239 --> 00:41:43,080 Speaker 3: like what analogy are you going to say? Now, well, no, okay, 757 00:41:43,120 --> 00:41:45,600 Speaker 3: I'm done with analogies. But if you think about the 758 00:41:45,640 --> 00:41:50,160 Speaker 3: skepticism that has recently emerged, you know, courtesy of this 759 00:41:50,320 --> 00:41:54,160 Speaker 3: Rubini and mirror paper around something as sort of like 760 00:41:54,360 --> 00:41:59,080 Speaker 3: boring and prosaic as treasury issuance. Yeah, imagine what would 761 00:41:59,160 --> 00:42:01,839 Speaker 3: happen if there was that trillion dollar coin. 762 00:42:01,960 --> 00:42:07,239 Speaker 2: Oh yeah, Well, by the way, listeners should check out 763 00:42:07,360 --> 00:42:10,400 Speaker 2: our great Bloomberg reporter. He's like a Foya guru. He 764 00:42:10,440 --> 00:42:14,080 Speaker 2: gets all these great documents. Jason Leopold actually got some 765 00:42:14,200 --> 00:42:17,520 Speaker 2: documents about the DOJ's commentary on the trillion dollar coin. 766 00:42:17,640 --> 00:42:20,799 Speaker 2: So August second, go check that out from Jason. You know, 767 00:42:20,840 --> 00:42:24,359 Speaker 2: you made the point earlier about everyone, you know benchmarking, 768 00:42:24,480 --> 00:42:27,759 Speaker 2: and this is really important too because with that Manuchin piece, 769 00:42:27,800 --> 00:42:31,399 Speaker 2: so it's like, well, maybe the twenty year is not necessary. 770 00:42:31,560 --> 00:42:34,719 Speaker 2: It's like thirty year treasury. It's like it's all kind 771 00:42:34,719 --> 00:42:36,839 Speaker 2: of arbitrary, right, Like it could have been a twenty 772 00:42:36,920 --> 00:42:38,960 Speaker 2: nine year, could be thirty long, but we like round 773 00:42:39,040 --> 00:42:43,759 Speaker 2: numbers for whatever reason, corporations benchmark off of them, etc. 774 00:42:44,120 --> 00:42:46,360 Speaker 2: Like it could have been that the longest part of 775 00:42:46,400 --> 00:42:49,239 Speaker 2: the curve was the twenty year, and then there would 776 00:42:49,239 --> 00:42:52,879 Speaker 2: be this long standing practice of then corporations would likely 777 00:42:52,920 --> 00:42:56,480 Speaker 2: be benchmarking their long endiituents from the twenty year. But 778 00:42:56,560 --> 00:42:59,080 Speaker 2: it really does speak to these sort of again, the 779 00:42:59,120 --> 00:43:02,960 Speaker 2: ecosystem point, the path dependency point, the stability point, the 780 00:43:03,000 --> 00:43:06,840 Speaker 2: consistency point, that what you've been doing for a while 781 00:43:07,520 --> 00:43:09,879 Speaker 2: on some level should be the benchmark for what you're 782 00:43:09,880 --> 00:43:10,600 Speaker 2: going to do next. 783 00:43:11,040 --> 00:43:13,640 Speaker 3: You know, an interesting thought experiment is to think what 784 00:43:13,760 --> 00:43:18,800 Speaker 3: financial markets would look like if humans weren't like predisposition 785 00:43:19,040 --> 00:43:22,560 Speaker 3: to like ground numbers. Oh, like what if everything instead 786 00:43:22,560 --> 00:43:24,400 Speaker 3: of the ten year? Like what if the benchmark was 787 00:43:24,400 --> 00:43:26,200 Speaker 3: I don't know, a nine or eleven year. I wonder 788 00:43:26,200 --> 00:43:26,920 Speaker 3: how much difference? 789 00:43:27,040 --> 00:43:29,160 Speaker 2: Right, Like, if we were a species that had nine 790 00:43:29,400 --> 00:43:33,160 Speaker 2: fingers or twelve, then we would not be likely using 791 00:43:33,200 --> 00:43:36,319 Speaker 2: base ten as our monetor as our numerical system. And 792 00:43:36,440 --> 00:43:38,319 Speaker 2: you know this is very you This could be an 793 00:43:38,320 --> 00:43:43,080 Speaker 2: interesting sci fi sci fi story about a species that 794 00:43:43,120 --> 00:43:46,280 Speaker 2: has a very developed financial system but they have fifteen 795 00:43:46,280 --> 00:43:49,240 Speaker 2: fingers and how it emerged in the US Base fifteen. 796 00:43:49,480 --> 00:43:54,279 Speaker 3: Joe, we're onto my fifth favorite subject, science fiction, which 797 00:43:54,320 --> 00:43:56,600 Speaker 3: comes after debt management. No, I think we should leave 798 00:43:56,600 --> 00:43:56,879 Speaker 3: it there. 799 00:43:57,080 --> 00:43:57,719 Speaker 2: Let's leave it there. 800 00:43:57,760 --> 00:44:01,239 Speaker 3: Okay. This has been another episode of the All Thoughts podcast. 801 00:44:01,320 --> 00:44:04,680 Speaker 3: I'm Tracy Alloway. You can follow me at Tracy Alloway and. 802 00:44:04,680 --> 00:44:07,200 Speaker 2: I'm Jill Wisenthal. You can follow me at the Stalwart. 803 00:44:07,400 --> 00:44:11,280 Speaker 2: Follow Amar Raganti. He's at Omar Raganti. Follow our producers 804 00:44:11,320 --> 00:44:15,160 Speaker 2: Carmen Rodriguez at Kerman Arman, Deash Bennett at Dash Bennett, 805 00:44:15,160 --> 00:44:18,480 Speaker 2: and Kelbrooks at Kelbrooks. 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