Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 2: I'm Jill Wisenthal, and I'm Tracy Alloway. Tracy. Every once
Speaker 2: in a while, and I mostly see this on Twitter,
Speaker 2: if I'm being honest, but every once in a while
Speaker 2: I see people trying to make a big deal about
Speaker 2: like the quarterly refunding announcement by the Treasury. Is if
Speaker 2: it's going to be some like big market mover on
Speaker 2: par with like a FED decision or something like that.
Speaker 3: I like how you say mostly on Twitter, like there's
Speaker 3: even a probability that you would be walking down the
Speaker 3: street and someone's talking about like debt issuing other than
Speaker 3: maybe looking at that debt clock or whatever it is.
Speaker 2: Yes, Like it's not something that comes up at a
Speaker 2: bar specifically, or he I don't hear people talk about
Speaker 2: it on the street. I also do know if it's
Speaker 2: like a real thing that like people in markets actually
Speaker 2: care about, or if it's just sort of this talking
Speaker 2: point pundit sort of quasi political thing. So we are
Speaker 2: recording this August eighth, but in late July, Neurial Rubini
Speaker 2: and Steven Mira put out this paper essentially saying that
Speaker 2: the nature of current issuance, which is that the government
Speaker 2: is borrowing a lot at the short end of the curve.
Speaker 2: I think they called it like this, like stealth quy,
Speaker 2: and maybe insinuated that there were sort of like political
Speaker 2: or specific economic motivations that causing them to issue where
Speaker 2: they do. So there's a lot of like talk about this.
Speaker 3: Yeah, so I am vaguely aware of some of this discussion.
Speaker 3: So the idea here per Robini and Mirren is they're
Speaker 3: calling it activist treasury issuance or ATI. And the idea,
Speaker 3: as you say, is maybe some of the stuff the
Speaker 3: Treasury is doing and specifically choosing to kind of reduce
Speaker 3: the amount of longer term treasuries they've been issuing and
Speaker 3: rely more on shorter term bills. That's something they've done recently.
Speaker 3: The idea is that in so doing, they're essentially mounting
Speaker 3: the stealth QE, easing financial conditions in a politically sensitive
Speaker 3: election year, flattening the old curve to stimulate growth, and
Speaker 3: then ultimately per their calculations. There's a very detailed paper.
Speaker 3: It's worth like one hundred bits in a benchmark interest
Speaker 3: rate cut, but it's being done by the Treasury, which
Speaker 3: is something that you know, the Treasury is supposed to
Speaker 3: be independent to the Federal Reserve. And so there's this
Speaker 3: discussion about like political motivations and conspiracy and things like that, right,
Speaker 3: And it's.
Speaker 2: A very like interesting topic because the question is like, Okay,
Speaker 2: there's some sort of framework that the Treasury uses to
Speaker 2: figure out where and when they're going to issue on
Speaker 2: the various curve, and are they deviating from that in
Speaker 2: some way? And you know, part of the timing here
Speaker 2: is that the FED is currently doing QT right, It's
Speaker 2: letting those longer dated assets roll off the balance sheet,
Speaker 2: and so then the question is like, oh, there's the
Speaker 2: Treasury purposely trying to counteract that. By okay, if the
Speaker 2: Fed is selling long term debt, is Treasury selling less
Speaker 2: long term debt? Muting the impact of monetary policy? All
Speaker 2: kinds of interesting questions. Anyway, we've never really done, I
Speaker 2: don't think, an episode on how governments manage debt and
Speaker 2: think about this challenge, and so it's a very timely
Speaker 2: time to do so and to sort of look at
Speaker 2: what really is going on.
Speaker 3: No, we haven't, and I'm really interested in this topic.
Speaker 3: I know you and I talk about the treasury market,
Speaker 3: but we haven't gotten into those specific decision making processes
Speaker 3: and the rules that maybe govern debt issuance. All I
Speaker 3: know about the treasury is the ultimate financial markets, Karen,
Speaker 3: because every quarter it's out, they're asking for a refund.
Speaker 3: But good one, Tracy, thank you, Thanks Joe. No, I'm
Speaker 3: excited about this conversation.
Speaker 1: Let's do it.
Speaker 2: I'm really excited because again, you know, there's the short
Speaker 2: term question, there's the interaction of issuance in QT, there's
Speaker 2: the election, there's the economic cycle, there's fighting inflation, and
Speaker 2: then we have huge deficits in this country and they're
Speaker 2: going to expect to be bigger and bigger. In February,
Speaker 2: the CBO put out an estimate that there was going
Speaker 2: to be another twenty trillion and accumulated deficits between twenty
Speaker 2: twenty five and twenty thirty four. The estimate will certainly
Speaker 2: be wrong in one direction or another, but there is
Speaker 2: a lot of debt management out there. Anyway. I am
Speaker 2: excited to say, we really do have the perfect guest.
Speaker 2: We're going to be speaking with Amar Raganti. He is
Speaker 2: a fixed income strategist at Wellington Management and Hartford Funds.
Speaker 2: But also importantly he spent four years twenty eleven to
Speaker 2: twenty fifteen in the Office of Debt Management itself. He
Speaker 2: was a debt manager. He made these decisions, understands how
Speaker 2: they're made within the Treasury. So Amara, thank you so
Speaker 2: much for coming on odd lots, Oh, thank you for
Speaker 2: having me totally someone I've really enjoyed talking to a
Speaker 2: meeting for a long time. Thrilled to have you on
Speaker 2: the show. Finally, let's start with like the really big
Speaker 2: question or sort of like maybe a frameworks question. You know,
Speaker 2: when the Fed is thinking about, Okay, we're going to
Speaker 2: issue thirty year treasuries or one month tea bills or whatever.
Speaker 2: You know, there are various factors that might go into that.
Speaker 2: There's demand for the market for duration. There's perhaps a
Speaker 2: desire to minimize total coupon payments over the life of
Speaker 2: the debt. There's other things that go into this question.
Speaker 2: There's an impulse for consistency and reliability in the schedule
Speaker 2: of auctions itself. Talk to us how you would describe
Speaker 2: what the Treasury or the Office of Debt Management is
Speaker 2: solving for when it decides where on the curve to
Speaker 2: issue and how much sure.
Speaker 4: In sort of bold headlines, the Office of Debt Management
Speaker 4: would say its job is to finance the government's deficit
Speaker 4: at the lowest cost for txpayers. The problem, of course,
Speaker 4: is that there there's a lot of things behind that.
Speaker 4: The implications go beyond just sort of what you'd call
Speaker 4: a number that you could scratch down on a piece
Speaker 4: of paper. And then additionally, you know, what you're trying
Speaker 4: to solve for is something that you won't know xanty,
Speaker 4: meaning like you won't know as you're doing it. You
Speaker 4: may know, may know after the fact, because you wouldn't
Speaker 4: have known how you would have changed financial conditions if
Speaker 4: you had done something different. It's sort of loosely like Heisenberg, right,
Speaker 4: like the moment you observe it or act on it,
Speaker 4: you're changing the very nature of the treasury curve and
Speaker 4: importantly the treasury ecosystem. So Treasury and the opposite of
Speaker 4: debt Management are aware of this, this dynamic that the
Speaker 4: fact is is that when they act, they actually change
Speaker 4: the market pricing and microstructure that exists around what's supposed
Speaker 4: to be the world's deepest and most liquid sovereign debt market.
Speaker 4: So they try to actually take what I'd call the
Speaker 4: most boring route they could possibly take, and that is
Speaker 4: something that's called regular and predictable. Now we toss this
Speaker 4: term around a lot. If you've even been ancillary to
Speaker 4: debt management practices, you know, using the words regular and
Speaker 4: predictable is almost like mentioned with like religious reverence. Right.
Speaker 4: The idea is you're there not to surprise the market,
Speaker 4: not to shock it, importantly, not to be a source
Speaker 4: of volatility. And this was pioneered by Paul Volker actually
Speaker 4: in the nineteen seventies to start a regular and predictable practice.
Speaker 4: But regular and predictable is there to accomplish a number
Speaker 4: of things. It's there to make sure that you are
Speaker 4: one not disturbing markets more than they need to be.
Speaker 4: Two by laying out what you're planning to do and
Speaker 4: do it in a very slow and methodical way, you know,
Speaker 4: you are effectively feeding the larger treasury ecosystem. So it's
Speaker 4: not like, oh, the curve is shaped this way or
Speaker 4: it's steeped this way, and we should issue more. Your
Speaker 4: job is to actually look across the entire treasury ecosystem,
Speaker 4: like who are the participants who are involved, and then
Speaker 4: come up with the way of making sure that ecosystem
Speaker 4: remains healthy. It's weirdly more like gardening, or like maintaining
Speaker 4: a natural environment than what you think of like the
Speaker 4: tactical issuance of a normal corporate issuer.
Speaker 3: Gardening is a really nice analogy for it, actually, because
Speaker 3: I don't think I mean, I only started like seriously
Speaker 3: gardening in the past couple of years. And the thing
Speaker 3: about gardening is people will say it's like art, but
Speaker 3: it's art in multi dimensions, right, because you're thinking about time,
Speaker 3: so like what stuff looks like throughout the growing season,
Speaker 3: you're thinking about colors, and then everything is on a
Speaker 3: super long term timeline, so you plant something now and
Speaker 3: you don't really see the impact until a year or so. Okay, wow,
Speaker 3: I just went we used to talk about gardening. No, okay,
Speaker 3: I want to move to a different analogy. So when
Speaker 3: I think about debt issuance, I used to cover corporate
Speaker 3: credit and so I think about, you know, being a
Speaker 3: treasurer at a large multinational like an Apple or a
Speaker 3: Microsoft or whatever, and the decision making process there where
Speaker 3: you know, if I decide there are favorable market conditions,
Speaker 3: I might go out and work with my bankers and
Speaker 3: decide to issue some debt. What is the difference between
Speaker 3: being a treasurer at a big company versus being US Treasury.
Speaker 4: Oh, a vast difference, right, And I too started on
Speaker 4: the other side as a corporate portfolio manager in the
Speaker 4: bond market. You'd look at companies coming to the market
Speaker 4: they either needed cash or as opportunistic. For the US
Speaker 4: government and for the debt management office, it's very different.
Speaker 4: It's that you are always going to be at various
Speaker 4: points on the curve, whether or not at that point.
Speaker 4: It's what i'd call tactically a good thing. And you know,
Speaker 4: this goes into that regular and predictable issue in cycle.
Speaker 4: And the point there, and this is how we get
Speaker 4: to cost, which is again different from how corporates measure cost,
Speaker 4: is that by being consistent, by helping this eco system thrive,
Speaker 4: you're going to create a liquidity premium. Right that because
Speaker 4: there is this regular and predictable nature to your issuance
Speaker 4: cycle that people understand, they're not going to be surprised
Speaker 4: that the availability of securities is going to be well
Speaker 4: calibrated to what the environment needs. And when I meant
Speaker 4: environment or ecosystem, I meant the entire eco. You want
Speaker 4: to service as broad and diversified group of investors as possible,
Speaker 4: and that includes people who will actively short your securities,
Speaker 4: right because that provides a supply outside of auction cycles
Speaker 4: for people to buy and also help stimulate repo markets
Speaker 4: and so on. So you want to be sure that
Speaker 4: you aren't attempting to use pure price on what's on
Speaker 4: the yield curve as a point on why or how
Speaker 4: you should issue. Now I want to be a little careful.
Speaker 4: There is a quantitative framework that Treasury has and it's
Speaker 4: a model that you know, a number of people collaborated on.
Speaker 4: Credit goes to people like Brian Sachs, Reading Ramaswami, Terry Belton, Christossia,
Speaker 4: a number of others who built this model, and it
Speaker 4: sort of gives a sense of okay historically based on
Speaker 4: a number of inputs, whereas Treasury benefited the most by issuing.
Speaker 4: That's like an important guidepost. But the more important part
Speaker 4: is the qualitative feedback that Treasury hears from its dealers,
Speaker 4: from investors, from central bank reserve managers who hold vast
Speaker 4: amounts of treasuries, and that all also feeds in along
Speaker 4: with the borrowing advisory committee into making issuance.
Speaker 2: Decisions right, and then feedback and the needs of various
Speaker 2: investors changes over time. And I mean, of course, in
Speaker 2: extreme periods, you know March twenty twenty, everyone just once
Speaker 2: the most liquid thing in the world, which is the
Speaker 2: shortest end of the curve. Obviously, other times there is
Speaker 2: a tremendous demand for duration and people want to buy
Speaker 2: at the long end. That all changes. Let's just talk
Speaker 2: before we even get to the specific. Now, you know
Speaker 2: you were in this office for years twenty eleven through
Speaker 2: twenty fifteen. What is the quarterly process? I know, there's
Speaker 2: like a survey that goes out, they look at the curve,
Speaker 2: et cetera. There's the estimates for how much is going
Speaker 2: to need to be financed in that quarterback. Can you
Speaker 2: walk us through the quarterly process that leads up to
Speaker 2: the announcement of this is the new auction schedule.
Speaker 4: Yeah, there's a number of pieces to it. One is
Speaker 4: within Treasury, there's a separate office called the Office of
Speaker 4: Fiscal Projections, and their job is to sort of project
Speaker 4: out what the upcoming cash needs over a given quarter
Speaker 4: are likely to be. And once you know the debt
Speaker 4: managers have that information, they can start thinking about, you know,
Speaker 4: the various allocations among their regular securities. But obviously there's
Speaker 4: issues that they want to receive feedback on, so there'll
Speaker 4: be a primary dealer survey which could address things like
Speaker 4: the composition of issuance, changes to issuance, or even other
Speaker 4: things like new products, issuance points, regulatory events that are
Speaker 4: impacting the demand for treasuries. So that goes out several
Speaker 4: weeks before the quarterly refunding process. Treasury then comes to
Speaker 4: New York and meets with a subset of these primary
Speaker 4: dealers at the FRBN Y and then Garner's feedback and
Speaker 4: has sort of very candid back and forths with questions
Speaker 4: and here's feedback on what the issuance process has been
Speaker 4: thus far, really to kind of sample what's on the
Speaker 4: primary dealer's minds at that given point. Following that, when
Speaker 4: they're back in DC, they begin the process of preparing
Speaker 4: their presentation to the Borrowing Advisory Committee. And already, you know,
Speaker 4: several months before, they've assigned what's called charges to individual
Speaker 4: members of the Borrowing Advisory Committee. And these charges are
Speaker 4: specific questions the Treasury would like answered with the expertise
Speaker 4: and help of the Borrowing Advisory Committee. This could be
Speaker 4: things like blue sky ideas of what else should we
Speaker 4: be issuing, or is there some impact likely to come
Speaker 4: on markets because of a change in regulations. It could
Speaker 4: span the gamut right. Treasury doesn't ask these questions casually.
Speaker 4: It doesn't mean they're going to act on recommendations, but
Speaker 4: it gives a sense of what's on the Office of
Speaker 4: Debt Management's mind. Treasury will then meet with the tea back.
Speaker 4: They'll hear the presentation of the various charges present to
Speaker 4: the tea back, and then later on that day the
Speaker 4: tea BAC will present to the Secretary or the senior
Speaker 4: most Treasury official available, and then on that following day
Speaker 4: there'll be a release of the broadest amount of information.
Speaker 4: There's a release that morning as well, but over those
Speaker 4: two days there's the release of the presentations, the minutes,
Speaker 4: the data packs, and that is the sort of signal
Speaker 4: to market on what issuance is likely to be. And
Speaker 4: there's a press conference that goes with this. And what's funny,
Speaker 4: as you guys have mentioned, is if you watch a
Speaker 4: Federal Reserve press conference and watch how tightly packed that
Speaker 4: room is then you go to a Treasury quarter refunding
Speaker 4: press conference, see how finley staffed day.
Speaker 2: I could actually get into one of those, because I'm
Speaker 2: probably I'm never going to get into a FED press conference,
Speaker 2: but we could probably get into that.
Speaker 4: But and this is not deliberate, but it's there to
Speaker 4: be boring.
Speaker 3: Why don't we bring it up to date with the
Speaker 3: most recent events and like specific decisions that have been made,
Speaker 3: because maybe that will help us understand the decision making
Speaker 3: framework that you just outlined. But this whole discussion has
Speaker 3: kicked off because despite the fact that the US government
Speaker 3: has a massive deficit, the US Treasury has said that
Speaker 3: it is sort of tempering the increase in its issuance
Speaker 3: of longer dated securities, So it's sort of backing away
Speaker 3: from it. I think in the most recent quarterly funding
Speaker 3: announcement they said they were going to keep the issuance
Speaker 3: of longer term debt basically unchanged.
Speaker 2: Also, Tracy, just to add on to that, we haven't
Speaker 2: inverted yield curve. So theoretically, if you wanted to borrow
Speaker 2: at the look, you know, one could say, oh, look,
Speaker 2: it's cheaper to borrow at the long end. Why are
Speaker 2: you selling all these bills when actually the cheapness is
Speaker 2: at the end.
Speaker 3: So this is the very essence of the current controversy. Ye,
Speaker 3: what is happening And I know you're not a treasury now,
Speaker 3: but what is happening when the Treasury comes out with
Speaker 3: that kind of decision?
Speaker 4: Okay, So the first kind of framework you want to
Speaker 4: think about is, and you would ask this initially, is
Speaker 4: how do they make these directional issuance decisions? Well, the
Speaker 4: first kind of thing is that Treasury does look at
Speaker 4: long term averages of where it is in its weighted
Speaker 4: average maturity, Right like, when you add all these securities together,
Speaker 4: what's sort of the average maturity, And historically it's been
Speaker 4: around sixty sixty one months. Treasury is well above that.
Speaker 4: Right now it's around seventy one months, so it's actually
Speaker 4: pretty pretty high up. The second thing, which.
Speaker 3: Just to be clear, most people would say that's a
Speaker 3: good thing, right you want to term out your debt.
Speaker 4: Maybe if you're a corporate treasurer you might want to
Speaker 4: do that, but there's a lot of arguments that you
Speaker 4: actually don't want to turn out your debt.
Speaker 3: Oh interesting, okay.
Speaker 4: So yeah, the first is is that, yes, the curve
Speaker 4: is inverted. That's if you decided to move issuance that way,
Speaker 4: chances are you could uninvert the curve. I'm not saying
Speaker 4: that's a definitive. It depends on how much or how
Speaker 4: likely you know what else is happening in markets. The
Speaker 4: second thing is is that as in a previous episode,
Speaker 4: I thought Josh Junger explained it really well. You know,
Speaker 4: you could roll these three month bills you know, all
Speaker 4: the way out to ten years, or you could issue
Speaker 4: a ten year and if you're sort of risk neutral,
Speaker 4: there's no savings, right or there's no gain or savings.
Speaker 4: It just means that forwards get realized, and effectively, it's
Speaker 4: effectively the same thing. So when Treasury does that, you're
Speaker 4: saying that over time, you're effectively making a tactical rates
Speaker 4: call that somehow that you think that ten year rates
Speaker 4: or thirty year oss won't go substantially lower. That's the
Speaker 4: first thing. The second thing is is that the sheer
Speaker 4: amount that you can put on the ten and thirty
Speaker 4: year is going to be less than what you can
Speaker 4: put in the bills market. Now, that's just absent anything
Speaker 4: that the Federal Reserve is doing. That's just generally true, right,
Speaker 4: Like it's just a broader and bigger it tends to
Speaker 4: be a broader and bigger.
Speaker 3: Shorter there's more demand for shorter dated securities.
Speaker 4: But the third thing is is that what Treasury really
Speaker 4: is trying to do is look around across the ecosystem
Speaker 4: and say, hey, where should we be feeding securities to
Speaker 4: over time? If we are kind of taking a risk
Speaker 4: neutral sort of approach to this, right that we're not
Speaker 4: extrapolating what forward curves.
Speaker 2: Are going to be.
Speaker 4: We don't know any more than a typical rate strategist
Speaker 4: or someone we know what we don't know about how
Speaker 4: market rates evolve over time. So because of that, our
Speaker 4: job is to help issue securities to where the biggest
Speaker 4: pools of capital are because that's how you issue risk
Speaker 4: free securities and keep up the health and demand for
Speaker 4: and liquidity of your asset class. So the biggest pool
Speaker 4: of money now, in particular, is still at the front end. Right.
Speaker 4: The amount of reserves that have been created is really dramatic.
Speaker 4: Now the pushback to this is, well, hey, the Federal
Speaker 4: Reserve created all these reserves, and now you're sort of
Speaker 4: taking advantage of this and you're issuing there Now, as
Speaker 4: I might have mentioned before the show, every decade, this
Speaker 4: criticism sort of gets leveled at Treasury that to some
Speaker 4: degree you are standing in the way of monetary policy.
Speaker 4: Back in twenty eleven and twelve, it was a very
Speaker 4: different set of people who had a critique. It was
Speaker 4: Larry Summers, Josh Rudolph sam Hansen, David Greenlaw who'd said
Speaker 4: Treasury was extending its long term issuance and extending the
Speaker 4: maturity the weighted average maturity of its debt while QE
Speaker 4: was going on, and it said, you know, the FED
Speaker 4: is buying long term securities and you're issuing long term securities.
Speaker 4: You're getting in the way of the Fed. And just
Speaker 4: the flip side of the critique is now, which is
Speaker 4: that the FED wants to tighten financial conditions, and by
Speaker 4: issuing shorter day to debt, you're not allowing financial conditions
Speaker 4: to tighten as much as this.
Speaker 3: The criticism back then was that they were potentially steepening
Speaker 3: the curve, whereas now people are like, oh, they're flattening
Speaker 3: the curve to stimulate growth.
Speaker 4: Yeah, to some degree, that's right, And Treasury's answer is
Speaker 4: usually remarkably consistent. We're announcing what we're doing well in
Speaker 4: advance of what we're going to do. If the Federal
Speaker 4: Reserve thinks this is inappropriate for monetary policy, it can
Speaker 4: absolutely take steps to do more. So the pushback in
Speaker 4: eleven and twelve or twelve and thirteen, I think was
Speaker 4: the Fed can buy more, right, Like, the Treasury is
Speaker 4: going to issue what it needs to issue for its
Speaker 4: financing needs in any given year or quarter. But the
Speaker 4: Fed's trying to take duration out of the market back then,
Speaker 4: and the Treasury is issuing duration, the Fed has the
Speaker 4: flexibility and freedom.
Speaker 2: To do more.
Speaker 4: The flip side here is if the Fed thought term
Speaker 4: premia wasn't enough or the curve wasn't steep enough, the
Speaker 4: Fed has tools where it can steep in the curve.
Speaker 4: It could outright sell securities from the SOMA portfolio and
Speaker 4: steep in the curve. What Treasury is really trying to
Speaker 4: do is it's almost like you walk into a room, right,
Speaker 4: and you move a large piece of furniture. You move
Speaker 4: around the piece of furniture like that furniture is not
Speaker 4: going to be moving dynamically, right, It's sort of set
Speaker 4: in its place. And the FED, as a central bank
Speaker 4: with multiple tools at hand can move around it, not
Speaker 4: saying rather easily. It complicates the job. But the whole
Speaker 4: point of regular and predictable is not just to signal
Speaker 4: to markets participants, but also to signal back to the
Speaker 4: central Bank that this is what's happening.
Speaker 3: Joe, this is my second favorite topic, which is interior decorating. Oh,
Speaker 3: you just talk about gardening.
Speaker 2: Can talk about this on the HGTV channel in the discord.
Speaker 2: Maybe we'll talk about it there. So this is actually
Speaker 2: really interesting because if the auction schedule is laid out
Speaker 2: in advance, if it's regular, et cetera, you can actually
Speaker 2: sort of test the proposition whether the Treasury is being
Speaker 2: activist by how quickly it changes. It sounds like in
Speaker 2: the Fed his total freedom and total institutional acceptance of
Speaker 2: the idea of agility, and that we expect it of them.
Speaker 2: But if the Treasury were being activist in some way,
Speaker 2: that would be weird because we would see it very
Speaker 2: explicitly in a changing nature of auction.
Speaker 4: Sure, And in fact, in the paper you reference that
Speaker 4: came out, the place that was pointed to was in
Speaker 4: Q three Q four of last year, when in the
Speaker 4: August refunding Treasury had said we plan to increase coupon sizes,
Speaker 4: and there was a lot of noise around this, and
Speaker 4: you could see really yields really sort of steepen out.
Speaker 4: And then in the November refunding, Treasury was like, yeah,
Speaker 4: we're increasing coupon sizes, but it's not going to be
Speaker 4: that much, and really yields slammed back down, and in
Speaker 4: fact we're well below those levels now. So it kind
Speaker 4: of behooves the point on whether or not you know
Speaker 4: that actually made a difference or not.
Speaker 2: So let's get more to the right now. I actually
Speaker 2: don't remember their numbers, Like, so the one that you
Speaker 2: said that average maturity currently for all outstanding that is
Speaker 2: actually on the long side, so seventy one, just to
Speaker 2: get back to the sixty month and the average has
Speaker 2: been historically about sixty months sixty one, Yeah, okay, so
Speaker 2: just to get back to average would argue for actually
Speaker 2: doing what the treasure is doing, which is issuing more
Speaker 2: at the short end of the curve. But why don't
Speaker 2: you talk to us about like what is the sort
Speaker 2: of split right now? And then more importantly, what are
Speaker 2: the overall market context, whether it's demand for duration, whether
Speaker 2: it's something about market microstructure, whether it's whatever is going
Speaker 2: on that sort of tell the Treasury go shorter.
Speaker 4: Yeah. So one, it's trying to think about what your
Speaker 4: long term averages has been and just sort of recalibrating
Speaker 4: a little bit over time. It's not a this is important,
Speaker 4: it's not a hard role. You don't need to do it.
Speaker 4: You also can look at things like the ratio of
Speaker 4: bills to coupon's outstanding. Again not a hard rule. So
Speaker 4: one of the sort of controversial things was that Treasury
Speaker 4: had typically given guidance saying we like to keep bill
Speaker 4: issuance around twenty outstanding about twenty percent, or issuance around
Speaker 4: twenty percent of the total issue in size. Where we
Speaker 4: are now, we're like a few percentage points above, right,
Speaker 4: And this has caused among some academics some consternation. But again,
Speaker 4: if you go to the eighties, it was thirty five percent, right, Like,
Speaker 4: it's fluctuated over time as issuance needs have taken place.
Speaker 4: And then as well as where are the largest sort
Speaker 4: of pools of money. Now, if you're going to issue
Speaker 4: into this environment with where you're trying not to cause
Speaker 4: lots of volatility, it would mean shortening right now. If
Speaker 4: there was an extraordinary demand for duration that was going on,
Speaker 4: there's no reason you need to shorten your wham. You
Speaker 4: could keep it at where it's at, you could keep
Speaker 4: it constant, you could increase it a little bit. For example,
Speaker 4: has gone substantially higher in terms of the way to
Speaker 4: average maturity. I think at times it's been at like
Speaker 4: ninety months. So the point is is that you're not
Speaker 4: constrained by any of these what i'd call like rules.
Speaker 4: It's to really read the market microstructure. Post Dot Frank,
Speaker 4: for example, Treasury understood that there'd be a really substantial
Speaker 4: need for a lot of short term, stable value collateral.
Speaker 4: People had to post margin for derivatives right they had
Speaker 4: to keep effectively more cash like things on hand, and
Speaker 4: Treasury reacted to that. It created the floating rate note
Speaker 4: as an example of something like that. The reason why
Speaker 4: the fifty year and one hundred year bond don't exist
Speaker 4: right now is that Treasury sees the market microstructure and
Speaker 4: doesn't think there's going to be regular and predictable demand
Speaker 4: at those levels. So every time that debate has come up,
Speaker 4: every time a new secretary comes in and thinks that
Speaker 4: they want to do something like that, they usually have
Speaker 4: not have to. They walk it back because staff shows
Speaker 4: them like the analysis.
Speaker 3: Okay, so you mentioned te back before the Treasury Borrowing
Speaker 3: Advisory Committee, which is like a representative group of market
Speaker 3: participants that advise the Treasury on things that the Treasury
Speaker 3: asked them to look at. And one of the things
Speaker 3: that Treasury has asked them to look at recently is
Speaker 3: the strategy for tea bills. And some people are interpreting
Speaker 3: this as like a sort of direct response to the
Speaker 3: ATI criticism, where like, well, let's ask the market participants
Speaker 3: if they think this is some big conspiracy, or if
Speaker 3: it matters or what the shape of tea bills should be.
Speaker 3: What does it mean that t back is like looking
Speaker 3: at this.
Speaker 4: Yeah, they will often use the charges as a way
Speaker 4: of responding to criticism, and to be fair, they actually
Speaker 4: want a sort of what I'd call a deep dive
Speaker 4: into that. They want to know are they inadvertently doing
Speaker 4: something that is causing consternation among market participants that's upsetting
Speaker 4: the sort of carefully laid out Treasury ecosystem. And that's
Speaker 4: exactly the type of feedback that they want, I think,
Speaker 4: where they you know, you could take a little umbrage
Speaker 4: at was this idea of activist issuance and some type
Speaker 4: of political push, because this is usually one of the
Speaker 4: most technocratic places within Treasury. The secretary generally has a
Speaker 4: lot of other things on his or her mind, everything
Speaker 4: from counter terrorism to the international affair side, which is
Speaker 4: financial diplomacy and debt management is an important piece, but
Speaker 4: it is a piece of that, and you typically rely
Speaker 4: on your Assistant Secretary for Financial Markets to really be
Speaker 4: that point person to handle that part of issuance.
Speaker 2: Yeah, I noticed that when you described a quarterly process
Speaker 2: for auction schedules, there was no point in which the
Speaker 2: Treasury Secretary walks in and say, hey, guys, it's an
Speaker 2: election here, we need to do this. Just yesterday, August seventh,
Speaker 2: Great Bloomberg story, Steve Mnuchen says it's time to kill
Speaker 2: the new treasury bond he created. So he revived auctions
Speaker 2: of a twenty year bond, and apparently there's not much
Speaker 2: demand for it. Yield is higher than ten year, yield
Speaker 2: is higher than thirty year. First of all, what causes it? Why?
Speaker 2: What is it about market structure and treasury that would
Speaker 2: cause something like a twenty year treasury to become orphaned
Speaker 2: like that.
Speaker 4: Yeah, well, first, you know, just a little bit of pushback. Yes,
Speaker 4: it's traded above the thirty year, but you know, in
Speaker 4: recent months that spread has actually collapsed, per okay, but
Speaker 4: it's still above the thirty year, and that's a fair point.
Speaker 4: There can be any number of things. The demand for
Speaker 4: a particular treasury or particular treasury security or a point
Speaker 4: on the curve is influenced by a whole lot of
Speaker 4: other things. So for example, you know, why is the
Speaker 4: thirty year in such demand. Well, one market participants already
Speaker 4: you know, incorporated o their portfolios. Private sector issuers use
Speaker 4: it as a benchmarking security for their own issuance. So
Speaker 4: in a new issuance period for corporates, what you often do,
Speaker 4: if you're an IGPM is you'll take delivery of the
Speaker 4: new private sector bond by you know, so and so company,
Speaker 4: and then you'll sell your thirty year treasury or you'll
Speaker 4: short that point in the curve, and that's how you're
Speaker 4: capturing the spread. That's a very normal occurrence, and that dynamic,
Speaker 4: you know, needs to build up at different points on
Speaker 4: the curve, and some points it's just not as useful.
Speaker 4: So it's very possible that the end demand, whether it's
Speaker 4: usage a benchmark security, whether you know, liability driven investors
Speaker 4: like pension funds that seek to immunize interstrate risk don't
Speaker 4: find it that useful, whether stripping activity around it is
Speaker 4: very limited. All of these things play into the overall
Speaker 4: demand for the security. Now, Treasury does its best ahead
Speaker 4: of time to try to figure out whether that's going
Speaker 4: to be the case or not. It's had challenges of
Speaker 4: the twenty year and as it happened in the early
Speaker 4: nineteen eighties, when the twenty year program was canceled in
Speaker 4: nineteen eighty six, it too, you know, showed a humped
Speaker 4: curve where the twenty year traded cheap to the thirty
Speaker 4: year point. So yeah, it's certainly not been a resounding success.
Speaker 4: It's also only been four years, and that's not a
Speaker 4: particularly long time from the perspective of a debt manager.
Speaker 2: Yeah, just to that point, Tracy, it sounds like a
Speaker 2: lot of this is just sort of path dependency. Like
Speaker 2: if everyone's been doing thirty years and that's where you're
Speaker 2: used to benchmarking, then it could have been twenty years
Speaker 2: to begin with. But if it wasn't then it wasn't.
Speaker 4: Well, I was just gonna say, that's where the gardening
Speaker 4: analogy is interesting. Right, You've tilled and planted and kept
Speaker 4: like this one area really sort of well nourished, and
Speaker 4: then you're trying to do it in an area that
Speaker 4: hasn't been there. It takes more time, and chances are
Speaker 4: it's probably not as fruitful. Immediately.
Speaker 3: Thank you so much for coming back to gardening. I
Speaker 3: appreciate it.
Speaker 4: Yeah, I'll get grief for this, I think so.
Speaker 3: Joe mentioned the news story yesterday and the other thing
Speaker 3: that happened yesterday. Again, we are recording this on August eighth.
Speaker 3: It has been an absolutely torrid, we very dramatic week
Speaker 3: in markets, but we had a treasury auction that was
Speaker 3: pretty weak. I think was the consensus. What constitutes a
Speaker 3: bad day for someone working in treasury, Like, what can
Speaker 3: go wrong?
Speaker 2: Good question?
Speaker 4: Oh wow, A lot of things can sometimes go wrong.
Speaker 4: So you know, it was a three basis point tail
Speaker 4: on the ten year auction. That's actually not like, that's
Speaker 4: not great.
Speaker 3: It's not a disaster. But I think most people they're
Speaker 3: already nervous and they see it.
Speaker 4: But given the rally, you had in rate markets. You know,
Speaker 4: it's effectively saying at these levels there might be a
Speaker 4: little bit of reduced demand and the levels need to
Speaker 4: back up a bit. So this isn't something that would
Speaker 4: cause anyone to particularly blink. If you remember around the
Speaker 4: Taper tantrum, that was a period of serious consternation because
Speaker 4: you were starting to see real weakness and tails in
Speaker 4: a series of auctions, and the fence communications around that time,
Speaker 4: whether deliberate or not deliberate, we're injecting substantial amount of volatility.
Speaker 4: So for individuals approaching auctions, price discovery of what things
Speaker 4: should settle at was becoming very, very, very challenged. So
Speaker 4: that particular time was one where we were watching how
Speaker 4: these auctions were tailing. The more tails you have, the
Speaker 4: less efficient. By definition, your auctions are right like, you're
Speaker 4: gonna get them periodically. But if they're consistently tailing, or
Speaker 4: the flip side, if they're consistently coming through substantially through
Speaker 4: the when issue market, you're again saying that price discovery
Speaker 4: is being challenged and it's not being transparent. So those
Speaker 4: are periods Treasury starts trying to figure out what's going
Speaker 4: on among the investor community. Is at external events, its exogynous.
Speaker 3: You know.
Speaker 4: Obviously the summer of eleven during the first downgrade, which
Speaker 4: is the first summer I started, and that office was
Speaker 4: that's like.
Speaker 3: Joe and I starting financial journalism in two thousand and eight,
Speaker 3: Like August two thousand and eight.
Speaker 4: That was a bad day, right, Like that was a
Speaker 4: bad summer for all intents and purposes. And oddly enough
Speaker 4: it actually didn't impact treasury demand one way or the other.
Speaker 4: Rates ended up actually rallying. But to treasury officials, it
Speaker 4: was the reputation and the pristineness of the treasury market
Speaker 4: that had been scratched be smirched, right, and they felt
Speaker 4: somewhat unfairly at that point. That was obviously a bad
Speaker 4: day anytime around. Debt ceilings are bad days. Anytime you
Speaker 4: question the full faith and credit, those are bad days.
Speaker 4: Almost everything else. It means that, hey, you need to
Speaker 4: do a lot more work on thinking about are you
Speaker 4: really optimizing issuance for the lay of the land.
Speaker 2: What causes structural demand for duration to change over time?
Speaker 2: I mean, I guess there's just sort of the economic cycle.
Speaker 2: And you know, again we understand what happened in March
Speaker 2: twenty twenty give me the most liquid thing in the world.
Speaker 2: But when you sort of like think a little bit longer,
Speaker 2: are there ways that people on markets or economists or
Speaker 2: whoever else try to project demand for duration? Why is
Speaker 2: there a particular and why now is there like people
Speaker 2: want the short end?
Speaker 4: Yeah, I think many have tried to come up with
Speaker 4: what i'd call a long term demand framework for duration.
Speaker 4: I don't think anything has been particularly sound. You could
Speaker 4: argue demographics, but that's unclear. It probably has a lot
Speaker 4: more to do with policy rates and expectations around policy
Speaker 4: rates and growth and inflation. That tells you how willing
Speaker 4: people are to go out on the curve, and as
Speaker 4: well as like volatility, right, because the further you go
Speaker 4: out in the curve, there's more money at risk on
Speaker 4: a per basis point a movement. So you could say
Speaker 4: in a narrow space, it's expectations of growth inflation as
Speaker 4: well as expectations of volatility like that would likely be
Speaker 4: the key driver for demand for duration. But there's a
Speaker 4: nuance to this. Are we talking funded or unfunded duration? Right?
Speaker 4: So if I look at like the treasury curve, and
Speaker 4: then I look at like the swaps market, well, the
Speaker 4: swap markets trade through the treasury, you have negative swap spreads,
Speaker 4: so you could say synthetically, the swaps market is the
Speaker 4: market for unfunded duration right where you don't have to
Speaker 4: put as many dollars to work to get similar duration characteristics.
Speaker 4: And if you converted longer term treasuries into swaps, these
Speaker 4: would be sofur plus instruments. And that's weird, Like this
Speaker 4: dynamics existed for a long time, but it's a strange
Speaker 4: dynamic because why would your risk free government security trade
Speaker 4: it so for plus not so for minus when you
Speaker 4: get out to the longer part of the curve. And
Speaker 4: the answer is is that there's balance sheet charges to
Speaker 4: putting that much money to work. Is one, So that impacts,
Speaker 4: you know, sort of the demand and differential between funded
Speaker 4: and unfunded duration. The second is are there other things
Speaker 4: you'd rather do with your cash versus go buy treasuries,
Speaker 4: but yet you still need the duration. And this is
Speaker 4: the advent of the whole, the differential between futures and
Speaker 4: cash treasuries and the treasury basis trade. And it's typically
Speaker 4: that there's investment managers who want to own credit, long
Speaker 4: duration credit, but want to manage their duration synthetically via futures,
Speaker 4: and that also causes that. And Stephen Kelly at Yale
Speaker 4: has written, you know, pretty authoritatively on this, and that
Speaker 4: could also be a signal for treasury. And it's a
Speaker 4: counterfactual to like a lot of the criticism out there
Speaker 4: of how could you say you should be issuing a
Speaker 4: lot more longer dated bonds when possibly the true price
Speaker 4: of duration is already telling you that the bonds you're
Speaker 4: issuing are not coming at the cheapest cost.
Speaker 3: Yeah, this is something that I think gets lost in
Speaker 3: the conversation sometimes, which is like treasuries are not the
Speaker 3: only source of duration. And I'm about to throw in
Speaker 3: my third favorite topic, which is cooking. But like, if
Speaker 3: you are a fund manager, you're trying to like bake.
Speaker 3: This is a labored analogy. You're trying to bake like
Speaker 3: a yield and duration, right, And like often the general
Speaker 3: recipe or the guidance that you're following is like you're
Speaker 3: trying to match and hopefully outperform some sort of benchmark,
Speaker 3: and there's like a degree of duration embedded in the benchmark.
Speaker 3: And I remember at various points in time, specifically I
Speaker 3: think it was twenty fifteen, like there was an argument
Speaker 3: that like the FED was sucking up too much duration
Speaker 3: from the market because it was buying not treasuries but
Speaker 3: mortgage bond securities, and so no one could match like
Speaker 3: the hypothetical benchmark index. And so anyway, it's just a point,
Speaker 3: just an excuse for me to talk about baking.
Speaker 4: I mean, it could have just been a common complaint.
Speaker 4: Normally the benchmark providers try to take out the securities
Speaker 4: owned by the FED, but there could have been operational
Speaker 4: issues in actually sourcing the cash duration that you need.
Speaker 4: So like, this is a real issue. And I try
Speaker 4: to think of this as there is no one lens
Speaker 4: that you look at lowest cost. Yeah right, there's multiple lenses.
Speaker 4: And what Treasury actually steps back and says, if we
Speaker 4: keep doing like the job we're doing of trying to
Speaker 4: maintain a liquid ecosystem, will earn a liquidity premium over time,
Speaker 4: over years, over decades, versus, hey, we have a short
Speaker 4: wham or we have a long wham. And every time
Speaker 4: that experiment's really been done where they pick a wham
Speaker 4: purely for cost, it's not ended that.
Speaker 2: Well, Amara Ganzi, thank you so much for coming on
Speaker 2: odd Lots. That was a really fantastic and cleared up
Speaker 2: a lot for me.
Speaker 3: That was really fun. This is like an all time
Speaker 3: favorite episode of mine, given that we talked about gardening,
Speaker 3: interior design, cooking, and debt management. That's great.
Speaker 4: Well, thank you for.
Speaker 2: Having me, Tracy. I really like that conversation. I'll just
Speaker 2: start with one sort of big picture thought, which is
Speaker 2: I really I think this is an important point that
Speaker 2: he made, which is that even if you're just trying
Speaker 2: to solve for the absolute minimum interest payments over time,
Speaker 2: that that doesn't necessarily say you should always sell at
Speaker 2: the cheapest part of the curve because of the importance
Speaker 2: of that healthy ecosystem, which is a long term thing.
Speaker 3: Yeah. I've got three takeaways from that conversation, which was
Speaker 3: very fun. But number one ties into what you just said.
Speaker 3: So this idea that a government is different to corporate. Yeah,
Speaker 3: and if you are a company, you're probably trying to
Speaker 3: turn out your debt at the lowest possible cost, and
Speaker 3: to some extent, the government will be trying to reduce
Speaker 3: interest expenses. But on the other hand, it has to
Speaker 3: take into consideration the entirety of the curve and the
Speaker 3: fact that it is actually providing a benchmark for other borrowers. Yes,
Speaker 3: And then the second takeaway is that reflexivity point, So
Speaker 3: the idea that as soon as you start issuing something,
Speaker 3: you can have an impact on the curve itself. And
Speaker 3: so the goal for the Treasury is really to be
Speaker 3: as risk neutral as possible, as Amar was saying. And
Speaker 3: then I guess the third thing that was really interesting
Speaker 3: to me was the relationship between the Treasury and monetary
Speaker 3: policy or the central Bank, and this idea that like, Okay,
Speaker 3: maybe treasury issuance could have an impact on financial conditions,
Speaker 3: but it's not like the FED is helpless here, and
Speaker 3: the FED has other tools that it could use to
Speaker 3: offset changes in the curve.
Speaker 2: Totally, I thought that was a really excellent and useful point.
Speaker 2: It's like, yes, okay, there are in this sense that
Speaker 2: there are times when the Treasury is issuing in such
Speaker 2: a manner that could be cross purposes with the FED.
Speaker 2: But the question of whether it's like activist or has
Speaker 2: some sort of motives. One way to test that is like,
Speaker 2: is it still being done in a sort of predictable
Speaker 2: manner that was laid out in advance, right, And so
Speaker 2: we want a FED that reacts very quickly to market
Speaker 2: data and changing conditions and all that, And so we
Speaker 2: give the Fed a broad leeway to sort of change
Speaker 2: its mind whatever it wants. And that's part of the
Speaker 2: institutional arrangement. If we started seeing that from the Treasury,
Speaker 2: where it's suddenly, you know, dramatically changing the auction schedule
Speaker 2: from one quarter to another or inter quarter emergency, you know,
Speaker 2: I guess that could be a thing that sort of
Speaker 2: would be the test of like whether it's like activist
Speaker 2: or not.
Speaker 3: Joe, can I say one thing please? I'm waiting to
Speaker 3: the very end of this conversation to say this because
Speaker 3: hopefully no one will hear it. But if you think about,
Speaker 3: like what analogy are you going to say? Now, well, no, okay,
Speaker 3: I'm done with analogies. But if you think about the
Speaker 3: skepticism that has recently emerged, you know, courtesy of this
Speaker 3: Rubini and mirror paper around something as sort of like
Speaker 3: boring and prosaic as treasury issuance. Yeah, imagine what would
Speaker 3: happen if there was that trillion dollar coin.
Speaker 2: Oh yeah, Well, by the way, listeners should check out
Speaker 2: our great Bloomberg reporter. He's like a Foya guru. He
Speaker 2: gets all these great documents. Jason Leopold actually got some
Speaker 2: documents about the DOJ's commentary on the trillion dollar coin.
Speaker 2: So August second, go check that out from Jason. You know,
Speaker 2: you made the point earlier about everyone, you know benchmarking,
Speaker 2: and this is really important too because with that Manuchin piece,
Speaker 2: so it's like, well, maybe the twenty year is not necessary.
Speaker 2: It's like thirty year treasury. It's like it's all kind
Speaker 2: of arbitrary, right, Like it could have been a twenty
Speaker 2: nine year, could be thirty long, but we like round
Speaker 2: numbers for whatever reason, corporations benchmark off of them, etc.
Speaker 2: Like it could have been that the longest part of
Speaker 2: the curve was the twenty year, and then there would
Speaker 2: be this long standing practice of then corporations would likely
Speaker 2: be benchmarking their long endiituents from the twenty year. But
Speaker 2: it really does speak to these sort of again, the
Speaker 2: ecosystem point, the path dependency point, the stability point, the
Speaker 2: consistency point, that what you've been doing for a while
Speaker 2: on some level should be the benchmark for what you're
Speaker 2: going to do next.
Speaker 3: You know, an interesting thought experiment is to think what
Speaker 3: financial markets would look like if humans weren't like predisposition
Speaker 3: to like ground numbers. Oh, like what if everything instead
Speaker 3: of the ten year? Like what if the benchmark was
Speaker 3: I don't know, a nine or eleven year. I wonder
Speaker 3: how much difference?
Speaker 2: Right, Like, if we were a species that had nine
Speaker 2: fingers or twelve, then we would not be likely using
Speaker 2: base ten as our monetor as our numerical system. And
Speaker 2: you know this is very you This could be an
Speaker 2: interesting sci fi sci fi story about a species that
Speaker 2: has a very developed financial system but they have fifteen
Speaker 2: fingers and how it emerged in the US Base fifteen.
Speaker 3: Joe, we're onto my fifth favorite subject, science fiction, which
Speaker 3: comes after debt management. No, I think we should leave
Speaker 3: it there.
Speaker 2: Let's leave it there.
Speaker 3: Okay. This has been another episode of the All Thoughts podcast.
Speaker 3: I'm Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 2: I'm Jill Wisenthal. You can follow me at the Stalwart.
Speaker 2: Follow Amar Raganti. He's at Omar Raganti. Follow our producers
Speaker 2: Carmen Rodriguez at Kerman Arman, Deash Bennett at Dash Bennett,
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