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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: Hello and welcome to a very special episode of the

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Speaker 2: au Thoughts podcast. I'm Tracy Alloway.

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Speaker 3: And I'm Jill.

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Speaker 4: Why isn't thal So what you are.

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Speaker 2: About to hear has the very very modest title of

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Speaker 2: the best ever panel on the world's most important market,

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Speaker 2: that is the US Treasury market. Of course, this was

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Speaker 2: recorded live at our New York event on June twenty sixth.

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Speaker 4: That's right. We had our recent oud Loots live event

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Speaker 4: in New York, and there's so much going on in

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Speaker 4: the treasury markets. There's questions about raids, there's questions about

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Speaker 4: foreign demand, there's questions about liquidity and the capacity of

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Speaker 4: existing treasury market infrastructure to handle all of the volume

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Speaker 4: of debt out there. So we wanted together some of

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Speaker 4: our favorite people to actually understand what's going on.

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Speaker 2: Yep, who's going to buy all the bonds? And we

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Speaker 2: did it. Indeed, have an absolutely amazing panel. So we

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Speaker 2: had Nellie Lang, she is a senior fellow over at

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Speaker 2: the Brookings Institution. She is also the former Undersecretary of

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Speaker 2: the Treasury for Domestic Finance. We had Ira Jersey, who

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Speaker 2: you might remember from a previous episode. He is the

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Speaker 2: chief US interest rate strategist over at Bloomberg Intelligence. And finally,

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Speaker 2: we had an odd thoughts favorite Josh Younger. He is

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Speaker 2: a lecturer at Columbia University, among many other things. So

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Speaker 2: we hope you enjoy take a listen.

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Speaker 4: So is anyone worried about who's going to buy the debt?

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Speaker 3: Who goes first for that one? Well, I.

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Speaker 5: Mean, I guess I'll start. I'm not worried about who's

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Speaker 5: going to buy the debt. You know, when we think

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Speaker 5: about markets generally, and especially markets for sovereign debt of

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Speaker 5: large countries that are relatively liquid, there will be a

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Speaker 5: buyer now the price might change, And I think that's

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Speaker 5: one of the things we have seen somewhat in recent weeks.

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Speaker 5: When you have somewhat of a slowing economy in the US,

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Speaker 5: you certainly see like two year yields have actually gone down,

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Speaker 5: you know, better part of fifty basis points over the

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Speaker 5: near term, but the long end hasn't done very much

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Speaker 5: at all. And I think that that is at least

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Speaker 5: in part and indication that there are some people who

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Speaker 5: are a little bit scared to buy that debt without

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Speaker 5: having some type of premium put onto it, so it'll

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Speaker 5: get bought.

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Speaker 3: The question is at what price?

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Speaker 5: And that's different, right, Like, I'm an investment strategist, I'm

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Speaker 5: not a policymaker, right, and I think that there's some

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Speaker 5: people who kind of mess that up with what like

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Speaker 5: our job is. When Nelly was at the Treasury Department,

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Speaker 5: she had a much different view of the world that

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Speaker 5: she had to do as opposed to what we do

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Speaker 5: as investors.

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Speaker 2: Well, I mean, on that note, it is true that

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Speaker 2: we have more i would say, price sensitive buyers in

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Speaker 2: the market than we used to. Right, So, we used

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Speaker 2: to have a lot of central banks, a lot of

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Speaker 2: sovereign wealth funds. They're still there, but compared to stick buyers,

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Speaker 2: retail like that has grown a lot more. Nellie, does

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Speaker 2: that change the way you think about debt versus you

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Speaker 2: know some years.

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Speaker 6: Ago absolutely so said prices will adjust, there will be

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Speaker 6: a buyer. But it used to be decades ago we

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Speaker 6: just had a much more stable investor base central banks,

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Speaker 6: foreign funds. Now it's like the non bank what we

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Speaker 6: would call the non bank financial institutions. It's hedge funds

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Speaker 6: for various reasons, private funds who use treasuries for liquidity

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Speaker 6: risk management. So the minute things get volatile, they'll want

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Speaker 6: to sell treasuries to help manage their own positions. And

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Speaker 6: so the investor base has changed. There will be buyers,

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Speaker 6: but it could change the price and change the way

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Speaker 6: prices fluctuate. You know, there just can be much more

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Speaker 6: volatility given the changing investor base. And that's something that Treasury,

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Speaker 6: who has to issue the debt regularly. We when I

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Speaker 6: was at Treasury, probably two hundred and fifty auctions a year.

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Speaker 6: They think about that, and it does affect how you

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Speaker 6: think about bills versus longer term coupons and all that.

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Speaker 7: I guess I would it's definitely saying the same thing

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Speaker 7: I should start with. I thought i'd get away from

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Speaker 7: disclaimers when I left the FED, but I have to say, hey,

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Speaker 7: disclaimer which is this is not investment advice and place

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Speaker 7: that has lots of positions, and nothing I say should

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Speaker 7: implicate what positions we may have or not have that said,

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Speaker 7: I you know, I think it's a similar way to

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Speaker 7: ask the question is why are they buying the debt

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Speaker 7: because the market's going to clear the price. We may

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Speaker 7: or may not like that price, but prices used to

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Speaker 7: fluctuate like all over time for various reasons. I mean,

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Speaker 7: during the Civil War we had a captive demand base

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Speaker 7: because if you wanted to be a bank, you had

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Speaker 7: to buy treasuries, and yet the price moved right, And

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Speaker 7: so for me, it's are you buying a security to

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Speaker 7: hedge a liability that is of similar duration to the

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Speaker 7: thing you're buying. Are you in it for the long haul?

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Speaker 7: And classic examples like a life insurance company which has

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Speaker 7: very long term longevity indexed is the term of art, right,

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Speaker 7: It's like, as long as you people are alive, there's

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Speaker 7: going to be life insurance. For companies, they have to

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Speaker 7: buy debt of similar length and they're going to be

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Speaker 7: very stable. They might be price sensitive, but probably less so.

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Speaker 7: And at the end of the day, they have this

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Speaker 7: liability that has to get funded. Banks to the same

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Speaker 7: extent have these very long term liabilities deposits or long

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Speaker 7: term liabilities, as we talked about that on one of

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Speaker 7: the episodes. So they need long term assets to hedge

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Speaker 7: the long term liabilities. Because you have bank accounts, you

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Speaker 7: can get your money back whenever you want, but you

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Speaker 7: tend not to, right, So that's a long term liability.

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Speaker 7: A hedge fund is not in it for ten years,

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Speaker 7: because that is not the nature of the business. They

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Speaker 7: are responding to price signals and relative value. Treasury trading

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Speaker 7: is really just a response to price signals where the

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Speaker 7: market is attempting to find the lowest cost buyer. There's

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Speaker 7: this great book from the nineteenth century which is inspiration

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Speaker 7: for Freeman on that a Freeman Night. But like it's

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Speaker 7: an interesting story which called Feeding Paris, which is by

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Speaker 7: Bustiacht and a French economist, and he was saying, if

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Speaker 7: one person was responsible for feeding Paris, everyone would die,

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Speaker 7: because it's impossible feed a million people if you're making

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Speaker 7: all of these decisions on your own. So price signals

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Speaker 7: get the food to where it has to go when

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Speaker 7: it has to go there. And so like the miracle

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Speaker 7: of the price mechanism is the fact that Paris wakes

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Speaker 7: up every morning and has food eat. And it's still true, right,

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Speaker 7: I mean, cities are complicated, and so in the treasury

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Speaker 7: market case, the feeding Paris equivalent is basis trades and

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Speaker 7: swap spread trades and every instance of buying a security

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Speaker 7: with levered money, repo and things like that, and hedging

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Speaker 7: the risk with the derivative where the price difference between

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Speaker 7: those things makes that worthwhile. And that's also a signal

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Speaker 7: that we don't have enough of those liability hedgers who

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Speaker 7: are in it for the long haul. We have to

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Speaker 7: find somebody else.

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Speaker 4: What are the data points we should be looking at,

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Speaker 4: because if I look at the ten year yield, you know,

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Speaker 4: it's something to do with the long term trajectory of

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Speaker 4: monetary policy, and that's going to fluctuate for various reasons

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Speaker 4: inflation growth, et cetera. If we want to capture some

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Speaker 4: of these other dynamics such as the change and who

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Speaker 4: are the buyers, or just the desire to even own

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Speaker 4: US dollar denominated debt assets, what should what else should

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Speaker 4: we be looking at?

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Speaker 5: Well, So the way that I look at US treasuries,

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Speaker 5: assuming that there's not real credit risk, right, yeah, I would,

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Speaker 5: I would still I would still argue that there's still

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Speaker 5: not credit risk more than a couple of basis points

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Speaker 5: that's embedded in the current yield of say the ten

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Speaker 5: year treasury, then ten year treasuries.

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Speaker 3: Again, the way that I look at it, it have to

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Speaker 3: be somewhere around nominal GDP growth.

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Speaker 5: Right, So basically at the trajectory of what is the

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Speaker 5: growth rate of the country in the longer run, and

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Speaker 5: that's what the market is going to spit out, plus

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Speaker 5: or minus, like you said, some kind of liquidity or

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Speaker 5: either premium or discount. Now I would argue that with treasuries.

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Speaker 5: To Josh's point, right there is that markets that have

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Speaker 5: deep liquid funding markets, deep liquid derivatives markets, in order

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Speaker 5: for someone to hedge that risk, you tend to get

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Speaker 5: better outcomes and lower yields because of that. So you know,

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Speaker 5: we did a study I actually when I was back

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Speaker 5: at Credit Sueez, I did something actually for the for

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Speaker 5: a World Bank study about what is liquidity and just

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Speaker 5: about every single OECD government bond market in the world.

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Speaker 5: And what you determined is bid offers were tightest when

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Speaker 5: you had deep in liquid funding markets like repo and

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Speaker 5: when you had derivative markets. So you look at Italy

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Speaker 5: that basically didn't have a derivative market that was particularly

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Speaker 5: deep in liquid versus France, which did, and a Spain

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Speaker 5: that did. Actually, so Spanish spreads were actually tighter than

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Speaker 5: Italian spreads, not that the yield levels might have been

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Speaker 5: the same, righting, But the difference is those deep liquid

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Speaker 5: like ancillary markets around things matter, and that's where the

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Speaker 5: US is unlike any other country in the world, because

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Speaker 5: we have all of those things in abundance that very

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Speaker 5: few other markets have, you know, And I think that's

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Speaker 5: one reason why it's going to be difficult for people

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Speaker 5: not to be involved with treasuries, either as a liability

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Speaker 5: management tool or as a trading instrument.

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Speaker 6: Uh well, oh, Mellie, please, I was just going to add,

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Speaker 6: I think just to emphasize, you know, it is long

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Speaker 6: term how to think about yield's long term nominal GDP growth,

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Speaker 6: but there's a lot of uncertainty about that growth and

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Speaker 6: that comes and you know, that fluctuates, and so if

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Speaker 6: you're uncertain about inflation, even if you have an expected

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Speaker 6: path of inflation, if it's high, it might be more volatile.

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Speaker 6: Or if you're uncertain about policies, any kind of policy

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Speaker 6: either you know, whether you're going to support the dollar

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Speaker 6: or you're going to support the US as a safe haven,

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Speaker 6: or you're going to support debt or try to reduce debt.

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Speaker 6: That adds uncertainty. So then treasury is you know, like

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Speaker 6: in long long run it is nominal GDP, but in

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Speaker 6: the meantime you're kind of going to fluctuate what these

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Speaker 6: we call premiums or discounts, you know, depending on how

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Speaker 6: much uncertainty there is about that. I tend to think

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Speaker 6: there's a fair amount of uncertainty about that. Right now.

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Speaker 2: Can you convince Joe that there is such a thing

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Speaker 2: as the term premium?

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Speaker 6: Well, yes, because so because if you define term premium

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Speaker 6: as the expectations hypothesis less, whatever the current yield is,

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Speaker 6: there's a residual, and that is a term premium. Then

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Speaker 6: you just try to define. You try to use things

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Speaker 6: you know about to explain the residual, but there's always

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Speaker 6: something left, and that, to me is a term premium empirically. Empirically,

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Speaker 6: I don't know if I'm going to convince you.

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Speaker 5: I think I called it on Bloomberg Radio. Actually I

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Speaker 5: called it the dark matter of the treasury market. Right,

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Speaker 5: that term premium must exist. The question is do we

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Speaker 5: measure it properly?

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Speaker 3: Right?

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Speaker 5: And that's the art of it as opposed to the

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Speaker 5: science of term premium.

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Speaker 7: So I like the easiest possible way to do this,

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Speaker 7: which is just to ask people what they think short

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Speaker 7: rates are going to be of a long run and

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Speaker 7: what long term rates are going to be tomorrow, and

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Speaker 7: the Philly Fad does this recorder and there is as

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Speaker 7: the Philly Fed. Okay, so they just ask economists to

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Speaker 7: make predictions as to what they think this that or

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Speaker 7: the other thing I'm going to do. And there's like

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Speaker 7: inflation and GDP growth and all these other things. But

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Speaker 7: once a year, I think the first quarter, so we

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Speaker 7: probably get that either now or soon. They ask tenure

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Speaker 7: average teable yields, and then they also ask about the

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Speaker 7: tenure yield, and so you're just literally asking people. There's

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Speaker 7: a lot of bells and whistles you can put on

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Speaker 7: these models, and some of the models with bells and

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Speaker 7: whistles incorporate the survey data. Some people just look only

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Speaker 7: at the survey data. Some people do just the modeling.

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Speaker 7: But in all these cases there's a residual doesn't mean

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Speaker 7: it's positive.

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Speaker 3: Is the really key thing? Term premium can be negative.

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Speaker 4: You can see why I'm unsatisfied.

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Speaker 3: Yeah, like this is the thing is dark matter.

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Speaker 4: They ask these surveys, yeah, which doesn't really like they

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Speaker 4: ask they ask a random survey. Sometimes it gains negative.

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Speaker 4: You can see why, Like I'm skeptical, Like, yeah, I'm

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Speaker 4: not totally satisfied by any of this.

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Speaker 5: No, there's a difference between the two year yield and

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Speaker 5: the ten year yields, so therefore that difference also true.

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Speaker 6: That could be the expectations of But you can write

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Speaker 6: down what you think or a survey of what you

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Speaker 6: think is between the two and ten and there's usually

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Speaker 6: a residual and can be positive or negative.

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Speaker 3: And having got we can.

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Speaker 6: Often be explained correlated with things like inflation, expectations.

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Speaker 7: Or other kinds of uncertain I tell you from experience

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Speaker 7: with both dark matter.

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Speaker 2: And turn pre josh was an actual.

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Speaker 7: Both deeply unsatisfying it with dark matter in the from

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Speaker 7: the physics perspective, well, we.

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Speaker 3: Don't know what it is.

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Speaker 7: There were attempts to explain it away in various like

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Speaker 7: trying to hang on to the old way we think

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Speaker 7: about the world is full of stuff that we can

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Speaker 7: touch and see, but those never worked and there's just

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Speaker 7: too much of it. And then don't even give me

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Speaker 7: a start on dark energy, which is the opposite, right,

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Speaker 7: And so I worked for for someone Hopkins years ago

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Speaker 7: who for his PhD thesy it was told to confirm

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Speaker 7: other experiments to measure the size and shape of the

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Speaker 7: universe and part of that was weighing it. And so

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Speaker 7: he did that experiment using supernova, which is a different

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Speaker 7: way to do there's lots of with different ways to

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Speaker 7: do things. Got a negative number, super unsatisfying negative mass

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Speaker 7: density of the universe, which he immediately say like, okay,

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Speaker 7: well this was a waste. Why did I spend two

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Speaker 7: years doing this? Instead he ran with it and it

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Speaker 7: turned out it was super real and it got a

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Speaker 7: Nobel Prize from that outcome, which I'm not saying we'll

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Speaker 7: come from term premium. Well, but sometimes the deeply unsatisfying

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Speaker 7: thing is the more you dig into it, the more

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Speaker 7: it's real. And I think that any way you slice

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Speaker 7: that information, either literally asking people or trying to model

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Speaker 7: what the market's telling you in some super sophisticated way,

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Speaker 7: you always come up with a residual. Now, the question

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Speaker 7: is what is that term premium telling you? And can

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Speaker 7: you find consistent ways to measure it and track it?

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Speaker 7: And this positive and negative thing is clearly the case,

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Speaker 7: and you know there's different microeconomic ways to explain why

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Speaker 7: that should or should not be true. It really comes

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Speaker 7: down to uncertainty. So and is the uncertainty correlated with yields.

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Speaker 7: So if I don't know what's going to happen in

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Speaker 7: the future to the economy, is that uncertainly greater or

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Speaker 7: lesser when the rates go up or down and that

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Speaker 7: naturally generates these dislocations.

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Speaker 2: Can you talk about the existence of something else, which

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Speaker 2: is bond vigilantes? So we just heard teleb talk about

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Speaker 2: the deficit, and yet I feel like the notion that

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Speaker 2: there are investors that you know, wake up one morning

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Speaker 2: and say, oh, wait, I'm really worried about the deficit.

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Speaker 2: Today's the day I'm gonna, you know, sell all my

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Speaker 2: bond exposure. That probably doesn't happen that often. And then secondly, Nelly,

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Speaker 2: I would be very interested in your take on this.

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Speaker 2: But you know, when you were at Treasury, did you

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Speaker 2: sit in the office going like, oh, the bond vigilantes

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Speaker 2: are going to get me. I better be disciplined with

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Speaker 2: my issuance schedule.

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Speaker 3: Was that a question for everyone?

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Speaker 6: Okay, Well, let me just no, I didn't sit there

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Speaker 6: with with that, And I was at the Fed for

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Speaker 6: thirty years before I went to Treasury. And you do

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Speaker 6: care a lot about bond fields. I mean, it's sort

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Speaker 6: of fundamental to the way monetary policy works. It's fundamental

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Speaker 6: to the way you issue treasure, but you don't think

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Speaker 6: about it on a daily basis, but it really influences

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Speaker 6: how you view events like these scarce events and if

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Speaker 6: these like you know, shocks that you weren't which by

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Speaker 6: definition you're not expecting. But if you've got a system

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Speaker 6: where there's a lot of leverage and you have an

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Speaker 6: unexpected shock, people are going to make trades and change

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Speaker 6: positions and that's when you worry. But it's not an

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Speaker 6: ongoing thing. So those kinds of to sort of prevent that,

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Speaker 6: you spend a lot of time as a policy maker,

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Speaker 6: where do we understand where the leverages and how can

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Speaker 6: we keep it manageable and make sure they can keep

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Speaker 6: their funding. This is goods to the point of funding

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Speaker 6: being you know, fundamental to being able to trade treasuries.

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Speaker 6: So it's kind of a bigger picture, but it's not

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Speaker 6: a daily thing. I don't know, but but it's important.

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Speaker 6: I actually think it's a really important market disciplining mechanism.

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Speaker 5: Yeah, the level of debt matters, right, So the bod

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Speaker 5: fingilantees like, there's no group of people who get together

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Speaker 5: at a bar and say, hey, We're.

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Speaker 3: Going to go sell treasures.

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Speaker 5: Today's the day, Yeah, exactly, like hey, tomorrow, you know

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Speaker 5: the debt is going to be too big, Let's just

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Speaker 5: sell treasuries. The issue, I think is manifests itself in

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Speaker 5: multiple ways. And one is this this steepening of the yield.

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Speaker 3: Curve that we've seen.

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Speaker 5: Right in a normal environment, you'd expect that anyway if

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Speaker 5: the Fed Reserve was expected to cut rags, which it

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Speaker 5: certainly has. But at the same time, you know, you

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Speaker 5: do have a growing fear that when you have two

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Speaker 5: trillion two point five trillion dollar deficits every year and

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Speaker 5: we wind up in a a in a debt trap

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Speaker 5: where interest rates and the interest on the debt ends

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Speaker 5: up being so large that the fiscal agents in Washington

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Speaker 5: will have to do something about it. But the market

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Speaker 5: hasn't yet forced them into it. And I think that

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Speaker 5: that's that forcing the government to actually act and do

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Speaker 5: something is really what might have to be the impetus

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Speaker 5: for you to actually get some kind of fiscal response.

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Speaker 5: The challenge is political, right, and that is because fifty

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Speaker 5: plus percent of our debt is interesting of excuming of

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Speaker 5: our spending by the federal government is Medicare, social Security,

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Speaker 5: and interest on the debt. Well, those are hard things

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Speaker 5: to contend with, right, It's really really difficult.

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Speaker 7: So I believe in bond vigilantes is not in a

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Speaker 7: US context. And what I mean by that is when

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Speaker 7: we talk about vigilantes, we're really referring to the nineties

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Speaker 7: EM crisis, where the concern was I'm not going to

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Speaker 7: get my dollar. There were dollar bonds. I'm not going

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Speaker 7: to get these dollars back because the party to this

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Speaker 7: debt doesn't have them and can't get them at a

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Speaker 7: reasonable price, and so the bond will default. And therefore

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Speaker 7: I want to get ahead of this default because you

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Speaker 7: know the classic bank run. I want to get out

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Speaker 7: before everyone else is before I'm stuck. In the US context,

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Speaker 7: you don't have that problem. So the question is who's

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Speaker 7: going to wake up and selling why?

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Speaker 3: I'm saying why again.

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Speaker 7: And they will sell because they are forced to sell.

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Speaker 7: And we've had the Repo vigilantes so to speak, strike

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Speaker 7: in twenty twenty and in twenty twenty five, and they

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Speaker 7: were forced to sell for a variety of reasons. One

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Speaker 7: was just the increase in the volatility market in general,

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Speaker 7: and then there were margin calls, especially in twenty twenty

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Speaker 7: where they were de levered, and the question then it

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Speaker 7: becomes like are we heading for that kind of scenario?

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Speaker 7: And the reason why the debt growth matters is because

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Speaker 7: these repo vigilantis are not worried about the credit.

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Speaker 3: Of the bonds they hold.

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Speaker 7: They're worried no one will buy them from them because

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Speaker 7: the banking system or the dealer of the bank affiliated

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Speaker 7: dealers that are to be supposed to be on the

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Speaker 7: other side of these trades won't have capacity, and every

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Speaker 7: trade's going to keep ticking cheaper and cheaper and cheaper,

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Speaker 7: and they're going to be in a difficult like sort

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Speaker 7: of mark to market situation. But that's a very different

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Speaker 7: set of considerations, and it's sort of related to overall

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Speaker 7: growth in the debt, but it's also related to the

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Speaker 7: structure of the market at how it places.

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Speaker 4: Since we're here and we're just clarifying things for me

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Speaker 4: that I've always wanted to, you know, learn about for years,

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Speaker 4: over ten years of been sitting at my Bloomberg terminal.

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Speaker 4: Every once in a while you get a red headline

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Speaker 4: and it's talked about like bid to cover in the tail,

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Speaker 4: and I can never tell if any of these auction

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Speaker 4: statistics really make it difference, like oh, terrible auction and

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Speaker 4: there's always a good auction. How should I consume that information?

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Speaker 4: How useful is that or for whom is that useful?

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Speaker 5: So so we actually started just earlier this year in

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Speaker 5: Bloomberg Intelligence having a grading methodology where we actually grade

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Speaker 5: these from DTA A plus, and you know, we look

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Speaker 5: at a variety of the bidding metrics in order to

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Speaker 5: do that and how they compare it to history. So

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Speaker 5: one of the big things that you've seen, and this

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Speaker 5: goes to Josh's issues about structure, you go back about

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Speaker 5: ten twelve years and you saw that primary dealers were

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Speaker 5: the biggest buyers of coon coupon debt. Today they're the smallest.

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Speaker 5: So you actually in the recent auctions, for example that

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Speaker 5: we just had this week with a seven year auction

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Speaker 5: earlier today, we had five year yesterday, the dealers only

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Speaker 5: bought about ten percent of the bonds, whereas if you

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Speaker 5: went back to twenty twelve twenty thirteen would have been

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Speaker 5: they would have bought forty to sixty percent of those auctions.

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Speaker 5: So the bidding metrics matter, and it matters because you

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Speaker 5: can see where the primary demand is coming from. And

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Speaker 5: we know now that you know, dealers, because of the

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Speaker 5: changes in market structure that have occurred, particularly since the

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Speaker 5: institution of Basil three, are much smaller buyers, and you know,

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Speaker 5: basically end users are much larger buyers, and some of

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Speaker 5: those are high frequency traders or maybe people who have

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Speaker 5: repo books and kind of need to fill them by

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Speaker 5: getting some collateral. Well, so all of those bidding metrics matter,

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Speaker 5: but the tails will show you that the market was

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Speaker 5: mispriced at the time that the auction closed versus what

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Speaker 5: the aggregate demand was at that auction. And that's that

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Speaker 5: tail is the single most important thing to look at,

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Speaker 5: followed by then some of the details in there about

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Speaker 5: who was actually purchasing, and then you know how much

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Speaker 5: they did for.

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Speaker 2: So, since we brought up market structure, it is true

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Speaker 2: that the treasury market has experienced a number of volatility

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Speaker 2: events at this point, which is weird because in theory

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Speaker 2: it's supposed to be a pretty boring, kind of staid,

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Speaker 2: old fashioned market and it's been anything.

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Speaker 3: But you're telling me that I've been boring.

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Speaker 2: I'm so sorry.

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Speaker 6: I'm so sorry.

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Speaker 3: Well, not anymore. That's supposed to be.

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Speaker 2: Supposed to be, and we have all these things that

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Speaker 2: have been put in place after every single volatility event,

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Speaker 2: like you know, the RRP of the standing repo facility.

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Speaker 2: We just had a change to the supplementary leverage ratio

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Speaker 2: to help dealer banks hold more treasuries. Why do we

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Speaker 2: still seem to have these all events happening.

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Speaker 3: I guess we should have them sometimes.

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Speaker 7: So the idea that treasury markets never had all events,

438
00:22:13,240 --> 00:22:15,040
Speaker 7: I mean, you go back to the nineties and their

439
00:22:15,080 --> 00:22:16,720
Speaker 7: massive all events in like two thousand and three is

440
00:22:16,720 --> 00:22:19,440
Speaker 7: a massive mortgage extension, there was a surprise seventy five basis.

441
00:22:19,160 --> 00:22:21,760
Speaker 3: Point hike in the night. There's always been these events.

442
00:22:21,840 --> 00:22:25,880
Speaker 7: I think the difference now is it's harder to pinpoint

443
00:22:25,880 --> 00:22:28,560
Speaker 7: a fundamental source. Like usually back then you could say, oh,

444
00:22:28,640 --> 00:22:31,760
Speaker 7: this was the GSEs, this was the FED hiking rates

445
00:22:31,760 --> 00:22:33,320
Speaker 7: in a way that people didn't expect. Now there's like

446
00:22:33,359 --> 00:22:36,320
Speaker 7: this whole process of trying to figure out why this

447
00:22:36,359 --> 00:22:41,080
Speaker 7: is happening, and it tends to happen very quickly, and

448
00:22:41,160 --> 00:22:43,399
Speaker 7: it tends to disrupt a lot of relationships. But like

449
00:22:43,600 --> 00:22:46,200
Speaker 7: I think, in one sense, this is stuff that's been

450
00:22:46,200 --> 00:22:49,280
Speaker 7: happening in the past, it's just the market is much larger,

451
00:22:49,600 --> 00:22:54,679
Speaker 7: the banking system's ability to provide that offset is.

452
00:22:53,280 --> 00:22:56,560
Speaker 3: Is lesser, and the.

453
00:22:58,200 --> 00:23:01,280
Speaker 7: Frequency with which trades happened it's just really gone up.

454
00:23:01,320 --> 00:23:03,960
Speaker 7: I mean, like the markets are very active now. But

455
00:23:03,960 --> 00:23:05,760
Speaker 7: I think that's all kind of a symptom of the issue,

456
00:23:05,880 --> 00:23:07,880
Speaker 7: which is it's kind of like a just in time

457
00:23:07,920 --> 00:23:11,440
Speaker 7: supply version of treasure markets, which is you have dealers

458
00:23:11,480 --> 00:23:12,960
Speaker 7: can't hold a lot of inventory, so they have the

459
00:23:13,000 --> 00:23:14,720
Speaker 7: match trades really efficiently. It used to be if you

460
00:23:14,760 --> 00:23:16,200
Speaker 7: didn't know the buyer and the seller, you just hold

461
00:23:16,240 --> 00:23:18,680
Speaker 7: it overnight. Now the high frequency traders do that for

462
00:23:18,720 --> 00:23:22,000
Speaker 7: them in a very efficient, fast paced way, and then

463
00:23:22,040 --> 00:23:24,440
Speaker 7: the dealers are trying to get hedge funds and set

464
00:23:24,600 --> 00:23:27,240
Speaker 7: through the price mechanism to hold inventory on their behalf

465
00:23:27,280 --> 00:23:29,760
Speaker 7: because basis trades are basically what dealers used to do,

466
00:23:30,200 --> 00:23:32,840
Speaker 7: and that's all very fragile, and so that combination of

467
00:23:32,840 --> 00:23:36,320
Speaker 7: things generates these shocks because the whole that arrangement.

468
00:23:35,840 --> 00:23:39,080
Speaker 3: Can collapse very quickly. But you know, at the end

469
00:23:39,119 --> 00:23:39,879
Speaker 3: of the day, like the.

470
00:23:41,359 --> 00:23:44,840
Speaker 7: Size of the market is growing faster than the dealers

471
00:23:44,960 --> 00:23:46,440
Speaker 7: have capacity to use.

472
00:23:46,720 --> 00:23:51,399
Speaker 6: No, yeah, I just to provide like a policy maker's perspective,

473
00:23:51,480 --> 00:23:54,440
Speaker 6: like you just step back. There's just been so many

474
00:23:54,520 --> 00:23:58,640
Speaker 6: changes in technology and then the changes in the buyer base.

475
00:23:58,720 --> 00:24:01,199
Speaker 6: We talked about the structural change on who buys now

476
00:24:01,320 --> 00:24:04,480
Speaker 6: versus inn So like in twenty fourteen, there was something

477
00:24:04,520 --> 00:24:07,880
Speaker 6: called a flash rally and the treasury I remember that, remember,

478
00:24:07,920 --> 00:24:11,520
Speaker 6: and like no one understood why the treasury yield went

479
00:24:11,600 --> 00:24:14,320
Speaker 6: up and down like thirty basis points in two minutes

480
00:24:14,359 --> 00:24:17,320
Speaker 6: and reversed, and it was It kind of scared the

481
00:24:17,359 --> 00:24:20,679
Speaker 6: public sector, you know, the government officials like how is

482
00:24:20,720 --> 00:24:23,080
Speaker 6: this possible? What is the trade? And had to do

483
00:24:23,119 --> 00:24:26,320
Speaker 6: a lot with these new high frequency traders. It took

484
00:24:26,359 --> 00:24:30,159
Speaker 6: a lot of time to like dissect what happened. So

485
00:24:30,240 --> 00:24:33,120
Speaker 6: that was even before there was a lot of treasury debt.

486
00:24:33,640 --> 00:24:35,919
Speaker 6: Now we have more treasury debt and there's just you know,

487
00:24:36,000 --> 00:24:39,639
Speaker 6: the volume. But I guess I would also separate the

488
00:24:40,000 --> 00:24:43,600
Speaker 6: I would make a distinction between volatility events and then

489
00:24:43,720 --> 00:24:49,080
Speaker 6: market ill liquidity events, just because if the mark if

490
00:24:49,320 --> 00:24:52,359
Speaker 6: news is volatile, there's new changes in the economy, you

491
00:24:52,400 --> 00:24:57,960
Speaker 6: would expect treasury yields and prices to be volatile. They should,

492
00:24:58,000 --> 00:25:00,320
Speaker 6: They're supposed to reflect that, and I think lot of

493
00:25:00,320 --> 00:25:04,119
Speaker 6: what it's been happening recently. But the concerns are when

494
00:25:05,080 --> 00:25:10,800
Speaker 6: you can't transact easily and quickly because you've pulled in

495
00:25:10,920 --> 00:25:14,160
Speaker 6: more dealers that they have pulled in more than they

496
00:25:14,240 --> 00:25:18,399
Speaker 6: might normally would just because of the higher volatility. So

497
00:25:18,480 --> 00:25:21,399
Speaker 6: you should always get a little well, you should always

498
00:25:21,400 --> 00:25:24,320
Speaker 6: get a little less liquidity when things get all little,

499
00:25:24,600 --> 00:25:27,560
Speaker 6: you know, just because risk is higher. But it's when

500
00:25:27,600 --> 00:25:30,760
Speaker 6: they sort of stop making markets or stop posting or

501
00:25:30,800 --> 00:25:34,000
Speaker 6: something then and you can't actually transact. Those are the

502
00:25:34,040 --> 00:25:36,280
Speaker 6: things that the policymakers really care about.

503
00:25:37,080 --> 00:25:39,879
Speaker 7: There's this balancing thing where we want treasure marks, we

504
00:25:39,960 --> 00:25:42,680
Speaker 7: deep in liquid. Deep in liquid means it's inexpensive to transact,

505
00:25:42,680 --> 00:25:44,760
Speaker 7: which means the dealers don't make much money per trade.

506
00:25:45,080 --> 00:25:47,160
Speaker 7: So the old joke like we're making losses, but we'll

507
00:25:47,160 --> 00:25:49,800
Speaker 7: make effort and volume kind of thing, and like hopefully

508
00:25:49,800 --> 00:25:50,120
Speaker 7: not that.

509
00:25:50,240 --> 00:25:50,600
Speaker 3: But the.

510
00:25:52,200 --> 00:25:55,440
Speaker 7: Response that if you want low transaction costs, the way

511
00:25:55,480 --> 00:25:57,880
Speaker 7: you get that, and so a functioning business is leverage.

512
00:25:57,880 --> 00:26:00,479
Speaker 7: And this has been the case for you know, seventy

513
00:26:00,480 --> 00:26:02,960
Speaker 7: five years since the Treasury fed a cord that this

514
00:26:03,080 --> 00:26:06,240
Speaker 7: was always the core issue. And so when you leverage

515
00:26:06,240 --> 00:26:09,959
Speaker 7: constrain banks, and even if the bank isn't leverage constrained,

516
00:26:10,000 --> 00:26:13,760
Speaker 7: when the desk is leverage constrained. When leverage is a

517
00:26:13,880 --> 00:26:16,119
Speaker 7: zero sum game within the institution, which is kind of

518
00:26:16,119 --> 00:26:18,640
Speaker 7: what these leverage ratios do. Everyone's fighting over the same

519
00:26:18,640 --> 00:26:22,000
Speaker 7: resource and that process introduces friction. And at the end

520
00:26:22,000 --> 00:26:23,639
Speaker 7: of the day, I think these all events are mostly

521
00:26:23,680 --> 00:26:25,400
Speaker 7: just time slippage. Like if you have to think about

522
00:26:25,440 --> 00:26:27,600
Speaker 7: things for too long, the market can run away from you.

523
00:26:28,240 --> 00:26:30,200
Speaker 7: So you know, in twenty twenty, if you had to

524
00:26:30,200 --> 00:26:32,640
Speaker 7: spend two days figuring out who gets incremental balance sheet,

525
00:26:33,080 --> 00:26:34,760
Speaker 7: a lot can happen in two days in March of

526
00:26:34,800 --> 00:26:38,480
Speaker 7: twenty twenty. And these very human experiences are kind of

527
00:26:38,480 --> 00:26:39,959
Speaker 7: a drive today.

528
00:26:40,119 --> 00:26:42,240
Speaker 5: And we talked about this on the show that we

529
00:26:42,280 --> 00:26:45,159
Speaker 5: did back in late April, about the April event, and

530
00:26:45,200 --> 00:26:48,520
Speaker 5: that time slippage is exactly a big thing part of

531
00:26:48,560 --> 00:26:54,080
Speaker 5: what happened when right before you fell asleep on April ninth, Right,

532
00:26:55,240 --> 00:26:57,960
Speaker 5: it's because like, look, you can't call the New York

533
00:26:58,000 --> 00:27:00,840
Speaker 5: dealer desk to get more dealer balent sheet at eleven

534
00:27:00,920 --> 00:27:03,280
Speaker 5: thirty at night in New York time, and when you're

535
00:27:03,320 --> 00:27:05,879
Speaker 5: trading in Hong Kong, right' It's it's hard to do that.

536
00:27:06,359 --> 00:27:10,560
Speaker 5: So so you get these vol events that are create

537
00:27:10,560 --> 00:27:13,760
Speaker 5: a liquid markets, but only at certain points in time, right,

538
00:27:13,800 --> 00:27:15,720
Speaker 5: and then that always gets armed away.

539
00:27:16,160 --> 00:27:17,760
Speaker 3: You know, people are are.

540
00:27:18,240 --> 00:27:20,200
Speaker 5: You know at the end of the day where we're

541
00:27:20,240 --> 00:27:22,760
Speaker 5: definitely not price takers, right, there's a lot of people

542
00:27:22,760 --> 00:27:27,160
Speaker 5: who are you know, basically want the price of their

543
00:27:27,560 --> 00:27:31,160
Speaker 5: of the asset to reflect the risk that they're taking.

544
00:27:31,600 --> 00:27:34,080
Speaker 5: And so you're going to get these instantaneous shifts and

545
00:27:34,119 --> 00:27:36,399
Speaker 5: expectations when you get a news event, when you get

546
00:27:36,440 --> 00:27:39,000
Speaker 5: a headline from you know, Donald Trump, and you think

547
00:27:39,000 --> 00:27:40,240
Speaker 5: that maybe the dollar is not going to be the

548
00:27:40,240 --> 00:27:44,160
Speaker 5: reserve currency anymore. That's going to affect dollar assets regardless

549
00:27:44,200 --> 00:27:45,200
Speaker 5: of where they are in the world.

550
00:27:59,440 --> 00:28:01,800
Speaker 2: This has been an another episode of the Authots podcast.

551
00:28:01,840 --> 00:28:05,080
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.

552
00:28:04,800 --> 00:28:07,600
Speaker 4: And I'm Jill Wisenthal. You can follow me at the Stalwart.

553
00:28:07,800 --> 00:28:11,159
Speaker 4: Follow our producers Carman Rodriguez at Carman armand dash Oll

554
00:28:11,160 --> 00:28:12,440
Speaker 4: Bennett at Dashbot and.

555
00:28:12,440 --> 00:28:13,760
Speaker 3: Kill Brooks at Kilbrooks.

556
00:28:13,960 --> 00:28:16,639
Speaker 4: For more Oddlots content, go to Bloomberg dot com slash

557
00:28:16,640 --> 00:28:18,880
Speaker 4: odd Lots where we have a daily newsletter and all

558
00:28:18,880 --> 00:28:21,520
Speaker 4: of our episodes, and you can chat about these topics

559
00:28:21,520 --> 00:28:25,080
Speaker 4: twenty four to seven in our discord discord dot gg

560
00:28:25,160 --> 00:28:26,000
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561
00:28:26,280 --> 00:28:28,359
Speaker 2: And if you enjoy Odd Lots, if you like it

562
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Speaker 2: when we do these live recordings, then please leave us

563
00:28:31,240 --> 00:28:35,199
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564
00:29:01,200 --> 00:29:01,520
Speaker 1: Eight