WEBVTT - How the US Treasury Will Fund the Next $20 Trillion in Debt 0:00:02.640 --> 0:00:16.640 Bloomberg Audio Studios, Podcasts, radio News. 0:00:18.800 --> 0:00:22.880 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:23.000 --> 0:00:26.639 I'm Jill Wisenthal, and I'm Tracy Alloway. Tracy. Every once 0:00:26.720 --> 0:00:29.640 in a while, and I mostly see this on Twitter, 0:00:29.760 --> 0:00:32.040 if I'm being honest, but every once in a while 0:00:32.560 --> 0:00:35.920 I see people trying to make a big deal about 0:00:35.920 --> 0:00:39.640 like the quarterly refunding announcement by the Treasury. Is if 0:00:39.640 --> 0:00:42.159 it's going to be some like big market mover on 0:00:42.240 --> 0:00:44.319 par with like a FED decision or something like that. 0:00:44.640 --> 0:00:47.880 I like how you say mostly on Twitter, like there's 0:00:47.920 --> 0:00:50.280 even a probability that you would be walking down the 0:00:50.320 --> 0:00:53.720 street and someone's talking about like debt issuing other than 0:00:53.760 --> 0:00:56.000 maybe looking at that debt clock or whatever it is. 0:00:56.720 --> 0:00:58.640 Yes, Like it's not something that comes up at a 0:00:58.680 --> 0:01:01.960 bar specifically, or he I don't hear people talk about 0:01:01.960 --> 0:01:04.120 it on the street. I also do know if it's 0:01:04.160 --> 0:01:07.800 like a real thing that like people in markets actually 0:01:07.840 --> 0:01:10.520 care about, or if it's just sort of this talking 0:01:10.600 --> 0:01:14.320 point pundit sort of quasi political thing. So we are 0:01:14.360 --> 0:01:18.600 recording this August eighth, but in late July, Neurial Rubini 0:01:18.640 --> 0:01:22.080 and Steven Mira put out this paper essentially saying that 0:01:22.160 --> 0:01:26.160 the nature of current issuance, which is that the government 0:01:26.240 --> 0:01:28.240 is borrowing a lot at the short end of the curve. 0:01:28.280 --> 0:01:30.640 I think they called it like this, like stealth quy, 0:01:30.840 --> 0:01:33.880 and maybe insinuated that there were sort of like political 0:01:34.160 --> 0:01:37.959 or specific economic motivations that causing them to issue where 0:01:38.000 --> 0:01:40.880 they do. So there's a lot of like talk about this. 0:01:41.240 --> 0:01:44.880 Yeah, so I am vaguely aware of some of this discussion. 0:01:45.080 --> 0:01:49.080 So the idea here per Robini and Mirren is they're 0:01:49.080 --> 0:01:53.520 calling it activist treasury issuance or ATI. And the idea, 0:01:53.600 --> 0:01:56.440 as you say, is maybe some of the stuff the 0:01:56.520 --> 0:02:02.200 Treasury is doing and specifically choosing to kind of reduce 0:02:02.720 --> 0:02:06.480 the amount of longer term treasuries they've been issuing and 0:02:06.720 --> 0:02:10.880 rely more on shorter term bills. That's something they've done recently. 0:02:11.360 --> 0:02:15.360 The idea is that in so doing, they're essentially mounting 0:02:15.440 --> 0:02:20.080 the stealth QE, easing financial conditions in a politically sensitive 0:02:20.639 --> 0:02:24.960 election year, flattening the old curve to stimulate growth, and 0:02:24.960 --> 0:02:28.720 then ultimately per their calculations. There's a very detailed paper. 0:02:29.240 --> 0:02:33.400 It's worth like one hundred bits in a benchmark interest 0:02:33.480 --> 0:02:36.040 rate cut, but it's being done by the Treasury, which 0:02:36.080 --> 0:02:38.160 is something that you know, the Treasury is supposed to 0:02:38.200 --> 0:02:42.240 be independent to the Federal Reserve. And so there's this 0:02:42.320 --> 0:02:47.079 discussion about like political motivations and conspiracy and things like that, right, 0:02:47.200 --> 0:02:47.639 And it's. 0:02:47.520 --> 0:02:51.040 A very like interesting topic because the question is like, Okay, 0:02:51.080 --> 0:02:54.000 there's some sort of framework that the Treasury uses to 0:02:54.000 --> 0:02:55.919 figure out where and when they're going to issue on 0:02:55.960 --> 0:02:58.320 the various curve, and are they deviating from that in 0:02:58.320 --> 0:03:00.799 some way? And you know, part of the timing here 0:03:01.040 --> 0:03:03.400 is that the FED is currently doing QT right, It's 0:03:03.520 --> 0:03:07.359 letting those longer dated assets roll off the balance sheet, 0:03:07.680 --> 0:03:09.320 and so then the question is like, oh, there's the 0:03:09.320 --> 0:03:13.360 Treasury purposely trying to counteract that. By okay, if the 0:03:13.400 --> 0:03:16.760 Fed is selling long term debt, is Treasury selling less 0:03:16.760 --> 0:03:20.320 long term debt? Muting the impact of monetary policy? All 0:03:20.400 --> 0:03:22.920 kinds of interesting questions. Anyway, we've never really done, I 0:03:22.919 --> 0:03:26.920 don't think, an episode on how governments manage debt and 0:03:27.000 --> 0:03:30.320 think about this challenge, and so it's a very timely 0:03:30.480 --> 0:03:33.200 time to do so and to sort of look at 0:03:33.240 --> 0:03:34.200 what really is going on. 0:03:34.480 --> 0:03:37.280 No, we haven't, and I'm really interested in this topic. 0:03:37.440 --> 0:03:39.560 I know you and I talk about the treasury market, 0:03:39.640 --> 0:03:43.480 but we haven't gotten into those specific decision making processes 0:03:43.520 --> 0:03:46.800 and the rules that maybe govern debt issuance. All I 0:03:46.840 --> 0:03:51.640 know about the treasury is the ultimate financial markets, Karen, 0:03:51.760 --> 0:03:55.040 because every quarter it's out, they're asking for a refund. 0:03:56.120 --> 0:03:59.520 But good one, Tracy, thank you, Thanks Joe. No, I'm 0:03:59.520 --> 0:04:00.680 excited about this conversation. 0:04:00.800 --> 0:04:01.280 Let's do it. 0:04:01.360 --> 0:04:03.720 I'm really excited because again, you know, there's the short 0:04:03.800 --> 0:04:07.119 term question, there's the interaction of issuance in QT, there's 0:04:07.200 --> 0:04:10.280 the election, there's the economic cycle, there's fighting inflation, and 0:04:10.320 --> 0:04:12.800 then we have huge deficits in this country and they're 0:04:12.840 --> 0:04:15.160 going to expect to be bigger and bigger. In February, 0:04:15.200 --> 0:04:17.200 the CBO put out an estimate that there was going 0:04:17.240 --> 0:04:20.839 to be another twenty trillion and accumulated deficits between twenty 0:04:20.880 --> 0:04:23.880 twenty five and twenty thirty four. The estimate will certainly 0:04:23.920 --> 0:04:27.000 be wrong in one direction or another, but there is 0:04:27.040 --> 0:04:29.440 a lot of debt management out there. Anyway. I am 0:04:29.480 --> 0:04:32.599 excited to say, we really do have the perfect guest. 0:04:33.000 --> 0:04:35.000 We're going to be speaking with Amar Raganti. He is 0:04:35.040 --> 0:04:39.320 a fixed income strategist at Wellington Management and Hartford Funds. 0:04:39.600 --> 0:04:44.040 But also importantly he spent four years twenty eleven to 0:04:44.080 --> 0:04:47.520 twenty fifteen in the Office of Debt Management itself. He 0:04:47.640 --> 0:04:50.920 was a debt manager. He made these decisions, understands how 0:04:50.920 --> 0:04:54.039 they're made within the Treasury. So Amara, thank you so 0:04:54.120 --> 0:04:56.000 much for coming on odd lots, Oh, thank you for 0:04:56.040 --> 0:04:59.000 having me totally someone I've really enjoyed talking to a 0:04:59.040 --> 0:05:01.279 meeting for a long time. Thrilled to have you on 0:05:01.360 --> 0:05:05.840 the show. Finally, let's start with like the really big 0:05:06.080 --> 0:05:09.520 question or sort of like maybe a frameworks question. You know, 0:05:09.560 --> 0:05:11.520 when the Fed is thinking about, Okay, we're going to 0:05:11.520 --> 0:05:14.839 issue thirty year treasuries or one month tea bills or whatever. 0:05:15.240 --> 0:05:17.720 You know, there are various factors that might go into that. 0:05:18.120 --> 0:05:22.479 There's demand for the market for duration. There's perhaps a 0:05:22.560 --> 0:05:26.600 desire to minimize total coupon payments over the life of 0:05:26.640 --> 0:05:29.200 the debt. There's other things that go into this question. 0:05:29.279 --> 0:05:34.120 There's an impulse for consistency and reliability in the schedule 0:05:34.120 --> 0:05:37.560 of auctions itself. Talk to us how you would describe 0:05:38.120 --> 0:05:41.520 what the Treasury or the Office of Debt Management is 0:05:41.640 --> 0:05:45.560 solving for when it decides where on the curve to 0:05:45.600 --> 0:05:47.360 issue and how much sure. 0:05:47.800 --> 0:05:50.599 In sort of bold headlines, the Office of Debt Management 0:05:50.640 --> 0:05:54.560 would say its job is to finance the government's deficit 0:05:54.839 --> 0:05:58.560 at the lowest cost for txpayers. The problem, of course, 0:05:58.800 --> 0:06:01.480 is that there there's a lot of things behind that. 0:06:01.960 --> 0:06:04.920 The implications go beyond just sort of what you'd call 0:06:04.920 --> 0:06:06.880 a number that you could scratch down on a piece 0:06:06.920 --> 0:06:10.800 of paper. And then additionally, you know, what you're trying 0:06:10.839 --> 0:06:14.200 to solve for is something that you won't know xanty, 0:06:14.400 --> 0:06:17.240 meaning like you won't know as you're doing it. You 0:06:17.360 --> 0:06:21.359 may know, may know after the fact, because you wouldn't 0:06:21.360 --> 0:06:24.360 have known how you would have changed financial conditions if 0:06:24.360 --> 0:06:28.240 you had done something different. It's sort of loosely like Heisenberg, right, 0:06:28.320 --> 0:06:30.440 like the moment you observe it or act on it, 0:06:30.520 --> 0:06:34.240 you're changing the very nature of the treasury curve and 0:06:34.320 --> 0:06:39.040 importantly the treasury ecosystem. So Treasury and the opposite of 0:06:39.040 --> 0:06:42.200 debt Management are aware of this, this dynamic that the 0:06:42.279 --> 0:06:45.200 fact is is that when they act, they actually change 0:06:45.279 --> 0:06:49.880 the market pricing and microstructure that exists around what's supposed 0:06:49.920 --> 0:06:53.120 to be the world's deepest and most liquid sovereign debt market. 0:06:53.600 --> 0:06:57.359 So they try to actually take what I'd call the 0:06:57.400 --> 0:07:01.839 most boring route they could possibly take, and that is 0:07:01.880 --> 0:07:05.440 something that's called regular and predictable. Now we toss this 0:07:05.560 --> 0:07:08.440 term around a lot. If you've even been ancillary to 0:07:08.520 --> 0:07:12.040 debt management practices, you know, using the words regular and 0:07:12.080 --> 0:07:15.960 predictable is almost like mentioned with like religious reverence. Right. 0:07:16.280 --> 0:07:19.080 The idea is you're there not to surprise the market, 0:07:19.400 --> 0:07:22.120 not to shock it, importantly, not to be a source 0:07:22.120 --> 0:07:25.920 of volatility. And this was pioneered by Paul Volker actually 0:07:25.960 --> 0:07:29.360 in the nineteen seventies to start a regular and predictable practice. 0:07:29.960 --> 0:07:33.600 But regular and predictable is there to accomplish a number 0:07:33.680 --> 0:07:38.000 of things. It's there to make sure that you are 0:07:38.360 --> 0:07:41.400 one not disturbing markets more than they need to be. 0:07:41.880 --> 0:07:46.040 Two by laying out what you're planning to do and 0:07:46.240 --> 0:07:49.320 do it in a very slow and methodical way, you know, 0:07:49.400 --> 0:07:53.400 you are effectively feeding the larger treasury ecosystem. So it's 0:07:53.440 --> 0:07:56.200 not like, oh, the curve is shaped this way or 0:07:56.200 --> 0:07:58.960 it's steeped this way, and we should issue more. Your 0:07:59.040 --> 0:08:02.200 job is to actually look across the entire treasury ecosystem, 0:08:02.280 --> 0:08:05.520 like who are the participants who are involved, and then 0:08:05.560 --> 0:08:08.240 come up with the way of making sure that ecosystem 0:08:08.280 --> 0:08:11.960 remains healthy. It's weirdly more like gardening, or like maintaining 0:08:12.000 --> 0:08:14.680 a natural environment than what you think of like the 0:08:14.800 --> 0:08:17.960 tactical issuance of a normal corporate issuer. 0:08:18.280 --> 0:08:21.000 Gardening is a really nice analogy for it, actually, because 0:08:21.000 --> 0:08:23.480 I don't think I mean, I only started like seriously 0:08:23.560 --> 0:08:26.360 gardening in the past couple of years. And the thing 0:08:26.400 --> 0:08:29.240 about gardening is people will say it's like art, but 0:08:29.320 --> 0:08:33.040 it's art in multi dimensions, right, because you're thinking about time, 0:08:33.320 --> 0:08:36.320 so like what stuff looks like throughout the growing season, 0:08:36.400 --> 0:08:39.720 you're thinking about colors, and then everything is on a 0:08:39.800 --> 0:08:42.920 super long term timeline, so you plant something now and 0:08:42.960 --> 0:08:46.560 you don't really see the impact until a year or so. Okay, wow, 0:08:46.640 --> 0:08:49.640 I just went we used to talk about gardening. No, okay, 0:08:49.720 --> 0:08:51.679 I want to move to a different analogy. So when 0:08:51.720 --> 0:08:54.160 I think about debt issuance, I used to cover corporate 0:08:54.160 --> 0:08:56.600 credit and so I think about, you know, being a 0:08:56.640 --> 0:09:00.320 treasurer at a large multinational like an Apple or a 0:09:00.400 --> 0:09:04.360 Microsoft or whatever, and the decision making process there where 0:09:04.720 --> 0:09:07.760 you know, if I decide there are favorable market conditions, 0:09:08.120 --> 0:09:10.120 I might go out and work with my bankers and 0:09:10.160 --> 0:09:14.400 decide to issue some debt. What is the difference between 0:09:15.040 --> 0:09:20.000 being a treasurer at a big company versus being US Treasury. 0:09:19.840 --> 0:09:22.800 Oh, a vast difference, right, And I too started on 0:09:22.880 --> 0:09:25.280 the other side as a corporate portfolio manager in the 0:09:25.280 --> 0:09:28.520 bond market. You'd look at companies coming to the market 0:09:28.720 --> 0:09:31.520 they either needed cash or as opportunistic. For the US 0:09:31.600 --> 0:09:35.320 government and for the debt management office, it's very different. 0:09:35.720 --> 0:09:39.160 It's that you are always going to be at various 0:09:39.200 --> 0:09:42.679 points on the curve, whether or not at that point. 0:09:43.040 --> 0:09:47.520 It's what i'd call tactically a good thing. And you know, 0:09:47.600 --> 0:09:50.520 this goes into that regular and predictable issue in cycle. 0:09:50.800 --> 0:09:52.880 And the point there, and this is how we get 0:09:52.880 --> 0:09:56.040 to cost, which is again different from how corporates measure cost, 0:09:56.520 --> 0:10:00.800 is that by being consistent, by helping this eco system thrive, 0:10:01.240 --> 0:10:05.120 you're going to create a liquidity premium. Right that because 0:10:05.200 --> 0:10:09.080 there is this regular and predictable nature to your issuance 0:10:09.080 --> 0:10:13.280 cycle that people understand, they're not going to be surprised 0:10:13.640 --> 0:10:17.920 that the availability of securities is going to be well 0:10:18.040 --> 0:10:22.120 calibrated to what the environment needs. And when I meant 0:10:22.280 --> 0:10:25.920 environment or ecosystem, I meant the entire eco. You want 0:10:25.960 --> 0:10:31.280 to service as broad and diversified group of investors as possible, 0:10:31.520 --> 0:10:34.640 and that includes people who will actively short your securities, 0:10:34.720 --> 0:10:38.640 right because that provides a supply outside of auction cycles 0:10:38.640 --> 0:10:41.840 for people to buy and also help stimulate repo markets 0:10:41.880 --> 0:10:44.920 and so on. So you want to be sure that 0:10:45.160 --> 0:10:48.280 you aren't attempting to use pure price on what's on 0:10:48.320 --> 0:10:51.160 the yield curve as a point on why or how 0:10:51.160 --> 0:10:53.800 you should issue. Now I want to be a little careful. 0:10:53.840 --> 0:10:59.160 There is a quantitative framework that Treasury has and it's 0:10:59.200 --> 0:11:02.400 a model that you know, a number of people collaborated on. 0:11:02.600 --> 0:11:07.640 Credit goes to people like Brian Sachs, Reading Ramaswami, Terry Belton, Christossia, 0:11:07.720 --> 0:11:11.200 a number of others who built this model, and it 0:11:11.320 --> 0:11:15.560 sort of gives a sense of okay historically based on 0:11:15.600 --> 0:11:19.520 a number of inputs, whereas Treasury benefited the most by issuing. 0:11:20.000 --> 0:11:23.360 That's like an important guidepost. But the more important part 0:11:23.400 --> 0:11:27.360 is the qualitative feedback that Treasury hears from its dealers, 0:11:27.880 --> 0:11:32.520 from investors, from central bank reserve managers who hold vast 0:11:32.520 --> 0:11:35.920 amounts of treasuries, and that all also feeds in along 0:11:35.960 --> 0:11:39.120 with the borrowing advisory committee into making issuance. 0:11:38.679 --> 0:11:42.160 Decisions right, and then feedback and the needs of various 0:11:42.160 --> 0:11:44.599 investors changes over time. And I mean, of course, in 0:11:44.720 --> 0:11:48.679 extreme periods, you know March twenty twenty, everyone just once 0:11:49.000 --> 0:11:51.080 the most liquid thing in the world, which is the 0:11:51.080 --> 0:11:55.000 shortest end of the curve. Obviously, other times there is 0:11:55.080 --> 0:11:58.360 a tremendous demand for duration and people want to buy 0:11:58.360 --> 0:12:00.760 at the long end. That all changes. Let's just talk 0:12:00.840 --> 0:12:03.760 before we even get to the specific. Now, you know 0:12:03.800 --> 0:12:06.720 you were in this office for years twenty eleven through 0:12:06.760 --> 0:12:10.120 twenty fifteen. What is the quarterly process? I know, there's 0:12:10.160 --> 0:12:12.840 like a survey that goes out, they look at the curve, 0:12:13.000 --> 0:12:16.120 et cetera. There's the estimates for how much is going 0:12:16.160 --> 0:12:18.640 to need to be financed in that quarterback. Can you 0:12:18.760 --> 0:12:22.000 walk us through the quarterly process that leads up to 0:12:22.040 --> 0:12:24.280 the announcement of this is the new auction schedule. 0:12:24.520 --> 0:12:27.679 Yeah, there's a number of pieces to it. One is 0:12:28.120 --> 0:12:30.599 within Treasury, there's a separate office called the Office of 0:12:30.600 --> 0:12:33.800 Fiscal Projections, and their job is to sort of project 0:12:33.840 --> 0:12:37.360 out what the upcoming cash needs over a given quarter 0:12:37.400 --> 0:12:40.920 are likely to be. And once you know the debt 0:12:40.920 --> 0:12:44.040 managers have that information, they can start thinking about, you know, 0:12:44.080 --> 0:12:48.600 the various allocations among their regular securities. But obviously there's 0:12:48.720 --> 0:12:51.960 issues that they want to receive feedback on, so there'll 0:12:52.000 --> 0:12:55.480 be a primary dealer survey which could address things like 0:12:55.520 --> 0:12:59.560 the composition of issuance, changes to issuance, or even other 0:12:59.600 --> 0:13:03.439 things like new products, issuance points, regulatory events that are 0:13:03.480 --> 0:13:06.720 impacting the demand for treasuries. So that goes out several 0:13:06.720 --> 0:13:10.320 weeks before the quarterly refunding process. Treasury then comes to 0:13:10.400 --> 0:13:13.760 New York and meets with a subset of these primary 0:13:13.760 --> 0:13:18.120 dealers at the FRBN Y and then Garner's feedback and 0:13:18.120 --> 0:13:20.840 has sort of very candid back and forths with questions 0:13:21.320 --> 0:13:24.120 and here's feedback on what the issuance process has been 0:13:24.160 --> 0:13:26.800 thus far, really to kind of sample what's on the 0:13:26.840 --> 0:13:31.079 primary dealer's minds at that given point. Following that, when 0:13:31.080 --> 0:13:34.400 they're back in DC, they begin the process of preparing 0:13:34.480 --> 0:13:39.000 their presentation to the Borrowing Advisory Committee. And already, you know, 0:13:39.080 --> 0:13:43.959 several months before, they've assigned what's called charges to individual 0:13:44.000 --> 0:13:47.439 members of the Borrowing Advisory Committee. And these charges are 0:13:47.480 --> 0:13:51.840 specific questions the Treasury would like answered with the expertise 0:13:51.920 --> 0:13:54.720 and help of the Borrowing Advisory Committee. This could be 0:13:54.840 --> 0:13:57.960 things like blue sky ideas of what else should we 0:13:58.000 --> 0:14:01.559 be issuing, or is there some impact likely to come 0:14:01.600 --> 0:14:04.000 on markets because of a change in regulations. It could 0:14:04.120 --> 0:14:08.040 span the gamut right. Treasury doesn't ask these questions casually. 0:14:08.320 --> 0:14:11.240 It doesn't mean they're going to act on recommendations, but 0:14:11.280 --> 0:14:13.719 it gives a sense of what's on the Office of 0:14:13.760 --> 0:14:17.440 Debt Management's mind. Treasury will then meet with the tea back. 0:14:17.880 --> 0:14:20.960 They'll hear the presentation of the various charges present to 0:14:21.000 --> 0:14:23.480 the tea back, and then later on that day the 0:14:23.560 --> 0:14:26.440 tea BAC will present to the Secretary or the senior 0:14:26.480 --> 0:14:29.800 most Treasury official available, and then on that following day 0:14:29.880 --> 0:14:33.240 there'll be a release of the broadest amount of information. 0:14:33.520 --> 0:14:36.680 There's a release that morning as well, but over those 0:14:36.680 --> 0:14:40.080 two days there's the release of the presentations, the minutes, 0:14:40.280 --> 0:14:43.000 the data packs, and that is the sort of signal 0:14:43.040 --> 0:14:45.560 to market on what issuance is likely to be. And 0:14:45.560 --> 0:14:48.880 there's a press conference that goes with this. And what's funny, 0:14:49.200 --> 0:14:51.640 as you guys have mentioned, is if you watch a 0:14:51.680 --> 0:14:54.920 Federal Reserve press conference and watch how tightly packed that 0:14:55.040 --> 0:14:57.760 room is then you go to a Treasury quarter refunding 0:14:57.800 --> 0:15:01.800 press conference, see how finley staffed day. 0:15:02.240 --> 0:15:04.280 I could actually get into one of those, because I'm 0:15:04.280 --> 0:15:06.480 probably I'm never going to get into a FED press conference, 0:15:06.520 --> 0:15:07.800 but we could probably get into that. 0:15:08.000 --> 0:15:11.280 But and this is not deliberate, but it's there to 0:15:11.480 --> 0:15:24.840 be boring. 0:15:27.600 --> 0:15:30.480 Why don't we bring it up to date with the 0:15:30.520 --> 0:15:34.640 most recent events and like specific decisions that have been made, 0:15:34.680 --> 0:15:37.640 because maybe that will help us understand the decision making 0:15:37.640 --> 0:15:41.920 framework that you just outlined. But this whole discussion has 0:15:42.040 --> 0:15:45.560 kicked off because despite the fact that the US government 0:15:45.640 --> 0:15:49.640 has a massive deficit, the US Treasury has said that 0:15:49.800 --> 0:15:54.360 it is sort of tempering the increase in its issuance 0:15:54.480 --> 0:15:57.920 of longer dated securities, So it's sort of backing away 0:15:57.960 --> 0:16:00.440 from it. I think in the most recent quarterly funding 0:16:00.520 --> 0:16:02.960 announcement they said they were going to keep the issuance 0:16:03.040 --> 0:16:05.440 of longer term debt basically unchanged. 0:16:05.640 --> 0:16:08.120 Also, Tracy, just to add on to that, we haven't 0:16:08.160 --> 0:16:11.240 inverted yield curve. So theoretically, if you wanted to borrow 0:16:11.320 --> 0:16:13.080 at the look, you know, one could say, oh, look, 0:16:13.120 --> 0:16:14.760 it's cheaper to borrow at the long end. Why are 0:16:14.760 --> 0:16:17.440 you selling all these bills when actually the cheapness is 0:16:17.480 --> 0:16:17.920 at the end. 0:16:18.000 --> 0:16:21.560 So this is the very essence of the current controversy. Ye, 0:16:21.760 --> 0:16:24.360 what is happening And I know you're not a treasury now, 0:16:24.440 --> 0:16:26.920 but what is happening when the Treasury comes out with 0:16:27.080 --> 0:16:28.120 that kind of decision? 0:16:28.360 --> 0:16:31.040 Okay, So the first kind of framework you want to 0:16:31.040 --> 0:16:33.240 think about is, and you would ask this initially, is 0:16:33.280 --> 0:16:37.320 how do they make these directional issuance decisions? Well, the 0:16:37.320 --> 0:16:39.800 first kind of thing is that Treasury does look at 0:16:39.840 --> 0:16:43.000 long term averages of where it is in its weighted 0:16:43.040 --> 0:16:46.240 average maturity, Right like, when you add all these securities together, 0:16:46.400 --> 0:16:49.480 what's sort of the average maturity, And historically it's been 0:16:49.520 --> 0:16:52.440 around sixty sixty one months. Treasury is well above that. 0:16:52.680 --> 0:16:55.400 Right now it's around seventy one months, so it's actually 0:16:55.520 --> 0:16:58.400 pretty pretty high up. The second thing, which. 0:16:58.360 --> 0:17:00.320 Just to be clear, most people would say that's a 0:17:00.360 --> 0:17:02.200 good thing, right you want to term out your debt. 0:17:02.280 --> 0:17:04.600 Maybe if you're a corporate treasurer you might want to 0:17:04.640 --> 0:17:07.960 do that, but there's a lot of arguments that you 0:17:08.000 --> 0:17:09.800 actually don't want to turn out your debt. 0:17:09.880 --> 0:17:11.280 Oh interesting, okay. 0:17:11.040 --> 0:17:14.879 So yeah, the first is is that, yes, the curve 0:17:14.960 --> 0:17:18.920 is inverted. That's if you decided to move issuance that way, 0:17:19.359 --> 0:17:22.160 chances are you could uninvert the curve. I'm not saying 0:17:22.200 --> 0:17:24.760 that's a definitive. It depends on how much or how 0:17:24.920 --> 0:17:27.560 likely you know what else is happening in markets. The 0:17:27.640 --> 0:17:30.320 second thing is is that as in a previous episode, 0:17:30.359 --> 0:17:32.399 I thought Josh Junger explained it really well. You know, 0:17:32.440 --> 0:17:34.919 you could roll these three month bills you know, all 0:17:34.960 --> 0:17:37.000 the way out to ten years, or you could issue 0:17:37.000 --> 0:17:39.240 a ten year and if you're sort of risk neutral, 0:17:39.560 --> 0:17:42.200 there's no savings, right or there's no gain or savings. 0:17:42.320 --> 0:17:45.760 It just means that forwards get realized, and effectively, it's 0:17:45.800 --> 0:17:50.520 effectively the same thing. So when Treasury does that, you're 0:17:50.760 --> 0:17:55.000 saying that over time, you're effectively making a tactical rates 0:17:55.080 --> 0:17:59.359 call that somehow that you think that ten year rates 0:17:59.440 --> 0:18:02.679 or thirty year oss won't go substantially lower. That's the 0:18:02.720 --> 0:18:06.240 first thing. The second thing is is that the sheer 0:18:06.280 --> 0:18:08.359 amount that you can put on the ten and thirty 0:18:08.440 --> 0:18:10.720 year is going to be less than what you can 0:18:10.760 --> 0:18:13.920 put in the bills market. Now, that's just absent anything 0:18:13.960 --> 0:18:16.960 that the Federal Reserve is doing. That's just generally true, right, 0:18:17.040 --> 0:18:19.040 Like it's just a broader and bigger it tends to 0:18:19.080 --> 0:18:20.080 be a broader and bigger. 0:18:19.920 --> 0:18:23.120 Shorter there's more demand for shorter dated securities. 0:18:23.200 --> 0:18:25.919 But the third thing is is that what Treasury really 0:18:26.040 --> 0:18:28.600 is trying to do is look around across the ecosystem 0:18:28.640 --> 0:18:32.000 and say, hey, where should we be feeding securities to 0:18:32.160 --> 0:18:34.560 over time? If we are kind of taking a risk 0:18:34.640 --> 0:18:37.040 neutral sort of approach to this, right that we're not 0:18:37.200 --> 0:18:38.880 extrapolating what forward curves. 0:18:38.640 --> 0:18:39.119 Are going to be. 0:18:39.440 --> 0:18:43.520 We don't know any more than a typical rate strategist 0:18:43.640 --> 0:18:46.640 or someone we know what we don't know about how 0:18:46.720 --> 0:18:50.520 market rates evolve over time. So because of that, our 0:18:50.640 --> 0:18:54.240 job is to help issue securities to where the biggest 0:18:54.240 --> 0:18:57.920 pools of capital are because that's how you issue risk 0:18:57.960 --> 0:19:00.840 free securities and keep up the health and demand for 0:19:01.240 --> 0:19:05.200 and liquidity of your asset class. So the biggest pool 0:19:05.200 --> 0:19:08.680 of money now, in particular, is still at the front end. Right. 0:19:08.720 --> 0:19:11.800 The amount of reserves that have been created is really dramatic. 0:19:12.359 --> 0:19:16.400 Now the pushback to this is, well, hey, the Federal 0:19:16.440 --> 0:19:19.679 Reserve created all these reserves, and now you're sort of 0:19:19.720 --> 0:19:24.040 taking advantage of this and you're issuing there Now, as 0:19:24.040 --> 0:19:27.240 I might have mentioned before the show, every decade, this 0:19:27.359 --> 0:19:30.600 criticism sort of gets leveled at Treasury that to some 0:19:30.680 --> 0:19:35.160 degree you are standing in the way of monetary policy. 0:19:35.560 --> 0:19:38.159 Back in twenty eleven and twelve, it was a very 0:19:38.160 --> 0:19:40.280 different set of people who had a critique. It was 0:19:40.600 --> 0:19:44.639 Larry Summers, Josh Rudolph sam Hansen, David Greenlaw who'd said 0:19:44.880 --> 0:19:48.639 Treasury was extending its long term issuance and extending the 0:19:48.680 --> 0:19:52.160 maturity the weighted average maturity of its debt while QE 0:19:52.400 --> 0:19:55.440 was going on, and it said, you know, the FED 0:19:55.560 --> 0:19:58.520 is buying long term securities and you're issuing long term securities. 0:19:58.840 --> 0:20:01.199 You're getting in the way of the Fed. And just 0:20:01.400 --> 0:20:03.560 the flip side of the critique is now, which is 0:20:03.920 --> 0:20:06.800 that the FED wants to tighten financial conditions, and by 0:20:06.920 --> 0:20:11.400 issuing shorter day to debt, you're not allowing financial conditions 0:20:11.400 --> 0:20:12.520 to tighten as much as this. 0:20:13.000 --> 0:20:16.000 The criticism back then was that they were potentially steepening 0:20:16.280 --> 0:20:18.960 the curve, whereas now people are like, oh, they're flattening 0:20:18.960 --> 0:20:20.040 the curve to stimulate growth. 0:20:20.160 --> 0:20:23.720 Yeah, to some degree, that's right, And Treasury's answer is 0:20:23.840 --> 0:20:27.919 usually remarkably consistent. We're announcing what we're doing well in 0:20:27.960 --> 0:20:30.679 advance of what we're going to do. If the Federal 0:20:30.760 --> 0:20:34.400 Reserve thinks this is inappropriate for monetary policy, it can 0:20:34.560 --> 0:20:38.600 absolutely take steps to do more. So the pushback in 0:20:38.680 --> 0:20:41.320 eleven and twelve or twelve and thirteen, I think was 0:20:42.240 --> 0:20:45.200 the Fed can buy more, right, Like, the Treasury is 0:20:45.200 --> 0:20:47.800 going to issue what it needs to issue for its 0:20:47.840 --> 0:20:50.760 financing needs in any given year or quarter. But the 0:20:50.800 --> 0:20:52.880 Fed's trying to take duration out of the market back then, 0:20:53.040 --> 0:20:55.480 and the Treasury is issuing duration, the Fed has the 0:20:55.560 --> 0:20:57.040 flexibility and freedom. 0:20:56.720 --> 0:20:57.200 To do more. 0:20:57.760 --> 0:21:00.400 The flip side here is if the Fed thought term 0:21:00.440 --> 0:21:04.320 premia wasn't enough or the curve wasn't steep enough, the 0:21:04.400 --> 0:21:07.800 Fed has tools where it can steep in the curve. 0:21:08.080 --> 0:21:11.919 It could outright sell securities from the SOMA portfolio and 0:21:12.000 --> 0:21:14.679 steep in the curve. What Treasury is really trying to 0:21:14.680 --> 0:21:17.160 do is it's almost like you walk into a room, right, 0:21:17.640 --> 0:21:20.680 and you move a large piece of furniture. You move 0:21:20.720 --> 0:21:23.359 around the piece of furniture like that furniture is not 0:21:23.400 --> 0:21:26.120 going to be moving dynamically, right, It's sort of set 0:21:26.160 --> 0:21:29.320 in its place. And the FED, as a central bank 0:21:29.560 --> 0:21:33.000 with multiple tools at hand can move around it, not 0:21:33.040 --> 0:21:36.600 saying rather easily. It complicates the job. But the whole 0:21:36.640 --> 0:21:39.359 point of regular and predictable is not just to signal 0:21:39.400 --> 0:21:42.280 to markets participants, but also to signal back to the 0:21:42.320 --> 0:21:44.440 central Bank that this is what's happening. 0:21:44.600 --> 0:21:48.440 Joe, this is my second favorite topic, which is interior decorating. Oh, 0:21:49.160 --> 0:21:50.320 you just talk about gardening. 0:21:50.440 --> 0:21:54.520 Can talk about this on the HGTV channel in the discord. 0:21:54.680 --> 0:21:57.080 Maybe we'll talk about it there. So this is actually 0:21:57.160 --> 0:22:01.280 really interesting because if the auction schedule is laid out 0:22:01.280 --> 0:22:04.800 in advance, if it's regular, et cetera, you can actually 0:22:04.800 --> 0:22:07.800 sort of test the proposition whether the Treasury is being 0:22:07.840 --> 0:22:11.320