Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Treasury is holding steady after recent gains as optimism grows
Speaker 2: over the Fed's first rate cut. Bond trade is also
Speaker 2: looking ahead to next week's quarterly refunding announcement from the
Speaker 2: Treasury Department. Alongside us in the studio here in New York,
Speaker 2: the former World Bank President David Malpas David good mornety, sir,
Speaker 2: good morning. I want to start with this quote, and
Speaker 2: I think it's a timely conversation for us. It comes
Speaker 2: from Hudson Bank Capital, Stephen Mirron, Noria Rabini. Two people.
Speaker 2: I'm sure you know. Well, here's the quote. By adjusting
Speaker 2: the maturity profile of its debt issuance, Treasury is dynamically
Speaker 2: managing financial conditions and through them, the economy, essentially taking
Speaker 2: over the core functions of the Federal Reserve. And they
Speaker 2: dubbed this novel tool activist Treasury Issuance or ATI. Can
Speaker 2: we just reflect on all of this? What did you
Speaker 2: make of this piece? What are they? Talagus?
Speaker 3: I love new acronyms. ATI so activism. So Treasury has
Speaker 3: to decide every quarter where whether to issue t bills
Speaker 3: or bonds, in which bonds to issue, and they do
Speaker 3: that in conjunction with Wall Street. And the problem, and
Speaker 3: I've written a lot about this in the Wall Street Journal,
Speaker 3: is that puts an overlap between them and the Federal Reserve.
Speaker 3: So that's a challenge right there. As you decide where
Speaker 3: the issuance is going, it affects the shape of the
Speaker 3: yield curve. And when you do that, you're affecting stock prices.
Speaker 3: So you've got this giant direction for capital based on
Speaker 3: whether Treasury is borrowing short or long right now, for
Speaker 3: years now, they've been borrowing too much at the short
Speaker 3: end and not enough in the ten year kind of window,
Speaker 3: the thirty year window.
Speaker 2: And why does that deliver meaningful consequences? Can we explore
Speaker 2: that a little bit more? If you think about the
Speaker 2: shape of the yield curve, it's the same amount of debt,
Speaker 2: it's just being issued at the front end of the
Speaker 2: yield curve and less of the long head. Why the
Speaker 2: meaningful consequences when you increase or decrease the level of
Speaker 2: debt the longer end of the curve.
Speaker 3: When QET started, that was the Federal Reserve buying a
Speaker 3: lot of bonds in say twenty ten, eleven twelve thirteen,
Speaker 3: that flattened the yield curve, so you had the FED
Speaker 3: buying longer maturities. Basically, the FED buying duration. So when
Speaker 3: the market hears that, that's positive for equities, but it's
Speaker 3: not positive for small businesses around the country. They borrow
Speaker 3: at the short end. So basically Treasury is the bigfoot
Speaker 3: coming in and borrowing right at the spot where your
Speaker 3: small businesses want to borrow for inventory for construction loans.
Speaker 3: So if you could, if you could change the shape
Speaker 3: of the yield curve to be more upsloped or upsloped
Speaker 3: at all, right now, you would liberate a lot of
Speaker 3: floating rate loans for people that really need them day
Speaker 3: by day in order to get their businesses growing.
Speaker 1: Some people could say that this is actually just smart policy,
Speaker 1: because ultimately the Treasure Department didn't want to lock in
Speaker 1: borrowing costs at five percent for the next ten years,
Speaker 1: and they want to have a short term kind of
Speaker 1: lease on rates that were at the highest levels in decades.
Speaker 1: Why don't you see it that.
Speaker 3: Way, Lisa, I think that's a bet made by the Treasury.
Speaker 3: So we already saw a giant bet made by the
Speaker 3: Fed on duration and They've lost billions and billions. I
Speaker 3: think it will end up being a trillion dollars from
Speaker 3: that mistake when they were buying long bonds with short
Speaker 3: term interest rates. Think Silicon Valley Bank, or think a
Speaker 3: hedge fund that made a bad bet. So as Treasury
Speaker 3: does that, they should be more neutral about the economy.
Speaker 3: Here we are coming into an election cycle and they
Speaker 3: have they're holding down the long end of the curve,
Speaker 3: which props up the equity market. It fuels think of
Speaker 3: where the capital is going right now. Treasury is barring
Speaker 3: short so it means a lot of long term, long
Speaker 3: duration capital can go into equities or can go into
Speaker 3: long term bonds. So you have this phenomenon for years
Speaker 3: now of corporations issuing bonds and buying back their stocks.
Speaker 3: You've got dividend recapitalizations going on now. This is all
Speaker 3: a phenomenon of the shape of the yield curve, which
Speaker 3: is being controlled, I think in an anti growth way
Speaker 3: by Treasury in the FED.
Speaker 1: This may sound like an esoteric conversation, it's pretty much anything,
Speaker 1: but is talking ahead of eight thirty am on Wednesday,
Speaker 1: where we're going to get the Treasury refunding agreement where
Speaker 1: they announced what kind of maturities at the amounts that
Speaker 1: they're going to be selling of government debt. It comes
Speaker 1: at a time where Fitch said in a recent report
Speaker 1: that heavy treasury supply is a key risk to our
Speaker 1: lower yields call across the curve. And it comes at
Speaker 1: a time when you potentially a rumor to have an
Speaker 1: ear toward another administration of Donald Trump. What would you
Speaker 1: if you were in a situation to dictate maturities do
Speaker 1: in order to say increased maturity of US government debt
Speaker 1: while not sort of causing this massive sell off at
Speaker 1: the long end that could be hugely disruptive.
Speaker 3: Yeah, and I think you have to be neutral from
Speaker 3: Treasury and from FED that you're not trying to manipulate
Speaker 3: the yield curve. You know, historically there was the remember
Speaker 3: the Operation Twist, which was a big failure in a
Speaker 3: previous decade, a previous century, and so the government has
Speaker 3: tried to do this and it ends up hurting people
Speaker 3: within the country. So all you have to do, I
Speaker 3: don't think it's that hard is say what your goals
Speaker 3: are that you're trying to not have the short term
Speaker 3: funding be the most efficient.
Speaker 2: The treasury is.
Speaker 3: Making a bet right now that they'll be able to
Speaker 3: refund at a lower yield later on. How do they
Speaker 3: know that? And wouldn't it be more confidence inspiring if
Speaker 3: they allowed the market to help them do that. They're
Speaker 3: asking the world to keep giving the US borrowed treasury
Speaker 3: borrowed in twenty twenty three third twenty three trillion dollars
Speaker 3: in its coincidence in twenty twenty three, and so that's
Speaker 3: a giant amount of debt for the market to digest.
Speaker 3: So say to the market, we are working toward a
Speaker 3: lower yield curve that's upsloped, that's going to maximize business
Speaker 3: confidence and be very positive for growth. But they're not
Speaker 3: doing that. They're saying instead, we're going to keep borrowing
Speaker 3: short term because, as Lisa is pointing out, it might
Speaker 3: be cheaper. If yields fall, it might cost them a lot.
Speaker 3: Right now, it hasn't been a good bet. If you
Speaker 3: look back, you know it is just to jump down.
Speaker 2: Is meant to be regular and predictable debt issuance out
Speaker 2: of the treasury. That's meant to be the core principle.
Speaker 2: Do you think we've moved away from that? Do you
Speaker 2: think this is a permanent fixture of policy. Now this tool, clearly.
Speaker 3: It depends on the political cycle where you're going to
Speaker 3: borrow on the yield curve and if you're trying to
Speaker 3: prop up markets in the short term and the long term,
Speaker 3: and that also affects and it's very important the actual
Speaker 3: capital flows going on in the economy. So there's been
Speaker 3: this heavy bias toward big companies and toward the government.
Speaker 3: So you know, that same point that you're making about
Speaker 3: where the Treasury is issuing means that the government feels
Speaker 3: comfortable with this giant fiscal debt because you're not borrowing
Speaker 3: at the at the long end of the curve. I
Speaker 3: think we need to go to a more neutral, balanced
Speaker 3: environment with a more independent FED that's not really facilitating
Speaker 3: this process through its own Is it coincidence that the
Speaker 3: Fed moved to QTU to to I mean to uh
Speaker 3: to phasing out qt right now in this in this
Speaker 3: part of the curve, they should be allowing that long
Speaker 3: bound portfolio to run off. That would be confidence inspiring
Speaker 3: for markets.
Speaker 2: David, It's going to catch up with me, sir. I
Speaker 2: feel like I've only scratched the surface and we need
Speaker 2: to go a lot deep from this topic. Thanks for giving,
Speaker 2: it's your insight. David Malpass, the former World Bank President