WEBVTT - The Greatest Ever Panel on the World's Most Important Market 0:00:02.480 --> 0:00:16.560 Bloomberg Audio Studios, Podcasts, radio News. 0:00:18.120 --> 0:00:21.319 Hello and welcome to a very special episode of the 0:00:21.320 --> 0:00:23.720 au Thoughts podcast. I'm Tracy Alloway. 0:00:23.440 --> 0:00:24.000 And I'm Jill. 0:00:24.040 --> 0:00:25.759 Why isn't thal So what you are. 0:00:25.720 --> 0:00:29.080 About to hear has the very very modest title of 0:00:29.200 --> 0:00:32.880 the best ever panel on the world's most important market, 0:00:32.960 --> 0:00:35.600 that is the US Treasury market. Of course, this was 0:00:35.680 --> 0:00:39.720 recorded live at our New York event on June twenty sixth. 0:00:40.120 --> 0:00:42.480 That's right. We had our recent oud Loots live event 0:00:42.560 --> 0:00:44.239 in New York, and there's so much going on in 0:00:44.240 --> 0:00:47.280 the treasury markets. There's questions about raids, there's questions about 0:00:47.320 --> 0:00:51.440 foreign demand, there's questions about liquidity and the capacity of 0:00:51.520 --> 0:00:55.280 existing treasury market infrastructure to handle all of the volume 0:00:55.360 --> 0:00:58.000 of debt out there. So we wanted together some of 0:00:58.000 --> 0:01:00.760 our favorite people to actually understand what's going on. 0:01:00.840 --> 0:01:03.000 Yep, who's going to buy all the bonds? And we 0:01:03.040 --> 0:01:06.120 did it. Indeed, have an absolutely amazing panel. So we 0:01:06.160 --> 0:01:09.360 had Nellie Lang, she is a senior fellow over at 0:01:09.360 --> 0:01:13.480 the Brookings Institution. She is also the former Undersecretary of 0:01:13.520 --> 0:01:17.200 the Treasury for Domestic Finance. We had Ira Jersey, who 0:01:17.240 --> 0:01:19.959 you might remember from a previous episode. He is the 0:01:20.080 --> 0:01:24.399 chief US interest rate strategist over at Bloomberg Intelligence. And finally, 0:01:24.480 --> 0:01:27.480 we had an odd thoughts favorite Josh Younger. He is 0:01:27.560 --> 0:01:31.520 a lecturer at Columbia University, among many other things. So 0:01:32.000 --> 0:01:33.800 we hope you enjoy take a listen. 0:01:34.600 --> 0:01:38.520 So is anyone worried about who's going to buy the debt? 0:01:39.200 --> 0:01:41.080 Who goes first for that one? Well, I. 0:01:42.840 --> 0:01:45.800 Mean, I guess I'll start. I'm not worried about who's 0:01:45.800 --> 0:01:47.760 going to buy the debt. You know, when we think 0:01:47.760 --> 0:01:52.640 about markets generally, and especially markets for sovereign debt of 0:01:53.160 --> 0:01:57.280 large countries that are relatively liquid, there will be a 0:01:57.320 --> 0:01:59.680 buyer now the price might change, And I think that's 0:01:59.680 --> 0:02:03.600 one of the things we have seen somewhat in recent weeks. 0:02:03.640 --> 0:02:07.320 When you have somewhat of a slowing economy in the US, 0:02:07.440 --> 0:02:10.680 you certainly see like two year yields have actually gone down, 0:02:10.760 --> 0:02:13.120 you know, better part of fifty basis points over the 0:02:13.160 --> 0:02:15.760 near term, but the long end hasn't done very much 0:02:15.800 --> 0:02:17.560 at all. And I think that that is at least 0:02:17.600 --> 0:02:20.960 in part and indication that there are some people who 0:02:21.040 --> 0:02:23.680 are a little bit scared to buy that debt without 0:02:23.720 --> 0:02:27.160 having some type of premium put onto it, so it'll 0:02:27.160 --> 0:02:27.640 get bought. 0:02:27.720 --> 0:02:28.880 The question is at what price? 0:02:28.919 --> 0:02:32.480 And that's different, right, Like, I'm an investment strategist, I'm 0:02:32.480 --> 0:02:34.680 not a policymaker, right, and I think that there's some 0:02:34.680 --> 0:02:37.520 people who kind of mess that up with what like 0:02:37.600 --> 0:02:39.639 our job is. When Nelly was at the Treasury Department, 0:02:40.000 --> 0:02:43.320 she had a much different view of the world that 0:02:43.360 --> 0:02:45.679 she had to do as opposed to what we do 0:02:45.760 --> 0:02:46.880 as investors. 0:02:47.240 --> 0:02:49.520 Well, I mean, on that note, it is true that 0:02:49.600 --> 0:02:52.800 we have more i would say, price sensitive buyers in 0:02:52.840 --> 0:02:55.120 the market than we used to. Right, So, we used 0:02:55.120 --> 0:02:56.640 to have a lot of central banks, a lot of 0:02:56.639 --> 0:03:00.920 sovereign wealth funds. They're still there, but compared to stick buyers, 0:03:01.560 --> 0:03:04.919 retail like that has grown a lot more. Nellie, does 0:03:04.960 --> 0:03:07.840 that change the way you think about debt versus you 0:03:07.840 --> 0:03:09.040 know some years. 0:03:08.800 --> 0:03:13.920 Ago absolutely so said prices will adjust, there will be 0:03:13.960 --> 0:03:17.480 a buyer. But it used to be decades ago we 0:03:17.560 --> 0:03:20.800 just had a much more stable investor base central banks, 0:03:20.960 --> 0:03:26.280 foreign funds. Now it's like the non bank what we 0:03:26.280 --> 0:03:30.440 would call the non bank financial institutions. It's hedge funds 0:03:30.480 --> 0:03:34.800 for various reasons, private funds who use treasuries for liquidity 0:03:34.880 --> 0:03:38.760 risk management. So the minute things get volatile, they'll want 0:03:38.800 --> 0:03:42.400 to sell treasuries to help manage their own positions. And 0:03:42.440 --> 0:03:46.320 so the investor base has changed. There will be buyers, 0:03:46.360 --> 0:03:50.320 but it could change the price and change the way 0:03:50.720 --> 0:03:53.240 prices fluctuate. You know, there just can be much more 0:03:53.320 --> 0:03:57.600 volatility given the changing investor base. And that's something that Treasury, 0:03:58.120 --> 0:04:03.280 who has to issue the debt regularly. We when I 0:04:03.320 --> 0:04:06.560 was at Treasury, probably two hundred and fifty auctions a year. 0:04:07.240 --> 0:04:10.600 They think about that, and it does affect how you 0:04:10.760 --> 0:04:14.600 think about bills versus longer term coupons and all that. 0:04:15.760 --> 0:04:18.320 I guess I would it's definitely saying the same thing 0:04:18.720 --> 0:04:20.560 I should start with. I thought i'd get away from 0:04:20.560 --> 0:04:22.640 disclaimers when I left the FED, but I have to say, hey, 0:04:22.680 --> 0:04:25.400 disclaimer which is this is not investment advice and place 0:04:26.000 --> 0:04:28.280 that has lots of positions, and nothing I say should 0:04:28.279 --> 0:04:31.800 implicate what positions we may have or not have that said, 0:04:32.960 --> 0:04:36.040 I you know, I think it's a similar way to 0:04:37.000 --> 0:04:39.200 ask the question is why are they buying the debt 0:04:39.400 --> 0:04:42.240 because the market's going to clear the price. We may 0:04:42.279 --> 0:04:44.320 or may not like that price, but prices used to 0:04:44.360 --> 0:04:47.160 fluctuate like all over time for various reasons. I mean, 0:04:47.240 --> 0:04:49.240 during the Civil War we had a captive demand base 0:04:49.279 --> 0:04:50.600 because if you wanted to be a bank, you had 0:04:50.600 --> 0:04:53.320 to buy treasuries, and yet the price moved right, And 0:04:53.400 --> 0:04:56.720 so for me, it's are you buying a security to 0:04:56.760 --> 0:05:01.000 hedge a liability that is of similar duration to the 0:05:01.000 --> 0:05:02.600 thing you're buying. Are you in it for the long haul? 0:05:03.000 --> 0:05:07.120 And classic examples like a life insurance company which has 0:05:07.320 --> 0:05:10.000 very long term longevity indexed is the term of art, right, 0:05:10.080 --> 0:05:12.279 It's like, as long as you people are alive, there's 0:05:12.320 --> 0:05:14.400 going to be life insurance. For companies, they have to 0:05:14.400 --> 0:05:17.560 buy debt of similar length and they're going to be 0:05:17.640 --> 0:05:20.560 very stable. They might be price sensitive, but probably less so. 0:05:20.600 --> 0:05:21.599 And at the end of the day, they have this 0:05:21.680 --> 0:05:24.360 liability that has to get funded. Banks to the same 0:05:24.400 --> 0:05:26.840 extent have these very long term liabilities deposits or long 0:05:26.920 --> 0:05:29.520 term liabilities, as we talked about that on one of 0:05:29.560 --> 0:05:31.680 the episodes. So they need long term assets to hedge 0:05:31.680 --> 0:05:34.400 the long term liabilities. Because you have bank accounts, you 0:05:34.400 --> 0:05:35.800 can get your money back whenever you want, but you 0:05:35.839 --> 0:05:38.320 tend not to, right, So that's a long term liability. 0:05:38.560 --> 0:05:41.080 A hedge fund is not in it for ten years, 0:05:41.360 --> 0:05:44.400 because that is not the nature of the business. They 0:05:44.400 --> 0:05:49.040 are responding to price signals and relative value. Treasury trading 0:05:49.120 --> 0:05:51.320 is really just a response to price signals where the 0:05:51.320 --> 0:05:54.360 market is attempting to find the lowest cost buyer. There's 0:05:54.360 --> 0:05:56.880 this great book from the nineteenth century which is inspiration 0:05:56.920 --> 0:05:58.880 for Freeman on that a Freeman Night. But like it's 0:05:58.920 --> 0:06:01.520 an interesting story which called Feeding Paris, which is by 0:06:01.520 --> 0:06:04.320 Bustiacht and a French economist, and he was saying, if 0:06:04.360 --> 0:06:07.360 one person was responsible for feeding Paris, everyone would die, 0:06:07.440 --> 0:06:09.800 because it's impossible feed a million people if you're making 0:06:09.839 --> 0:06:11.960 all of these decisions on your own. So price signals 0:06:11.960 --> 0:06:13.920 get the food to where it has to go when 0:06:13.920 --> 0:06:15.560 it has to go there. And so like the miracle 0:06:15.600 --> 0:06:18.920 of the price mechanism is the fact that Paris wakes 0:06:19.000 --> 0:06:22.640 up every morning and has food eat. And it's still true, right, 0:06:22.640 --> 0:06:25.799 I mean, cities are complicated, and so in the treasury 0:06:25.800 --> 0:06:29.520 market case, the feeding Paris equivalent is basis trades and 0:06:29.800 --> 0:06:34.080 swap spread trades and every instance of buying a security 0:06:34.080 --> 0:06:37.320 with levered money, repo and things like that, and hedging 0:06:37.320 --> 0:06:39.679 the risk with the derivative where the price difference between 0:06:39.680 --> 0:06:42.480 those things makes that worthwhile. And that's also a signal 0:06:42.520 --> 0:06:45.800 that we don't have enough of those liability hedgers who 0:06:45.839 --> 0:06:47.120 are in it for the long haul. We have to 0:06:47.120 --> 0:06:48.119 find somebody else. 0:06:48.800 --> 0:06:50.680 What are the data points we should be looking at, 0:06:50.720 --> 0:06:54.080 because if I look at the ten year yield, you know, 0:06:54.160 --> 0:06:56.360 it's something to do with the long term trajectory of 0:06:56.400 --> 0:06:59.280 monetary policy, and that's going to fluctuate for various reasons 0:06:59.320 --> 0:07:02.520 inflation growth, et cetera. If we want to capture some 0:07:02.560 --> 0:07:05.360 of these other dynamics such as the change and who 0:07:05.400 --> 0:07:08.200 are the buyers, or just the desire to even own 0:07:08.600 --> 0:07:12.440 US dollar denominated debt assets, what should what else should 0:07:12.480 --> 0:07:13.320 we be looking at? 0:07:13.720 --> 0:07:16.520 Well, So the way that I look at US treasuries, 0:07:16.520 --> 0:07:18.880 assuming that there's not real credit risk, right, yeah, I would, 0:07:18.880 --> 0:07:21.160 I would still I would still argue that there's still 0:07:21.240 --> 0:07:24.000 not credit risk more than a couple of basis points 0:07:24.000 --> 0:07:27.280 that's embedded in the current yield of say the ten 0:07:27.360 --> 0:07:29.640 year treasury, then ten year treasuries. 0:07:30.640 --> 0:07:32.280 Again, the way that I look at it, it have to 0:07:32.280 --> 0:07:34.400 be somewhere around nominal GDP growth. 0:07:34.280 --> 0:07:37.040 Right, So basically at the trajectory of what is the 0:07:37.040 --> 0:07:39.480 growth rate of the country in the longer run, and 0:07:39.520 --> 0:07:42.600 that's what the market is going to spit out, plus 0:07:42.680 --> 0:07:45.080 or minus, like you said, some kind of liquidity or 0:07:45.520 --> 0:07:48.320 either premium or discount. Now I would argue that with treasuries. 0:07:48.320 --> 0:07:52.840 To Josh's point, right there is that markets that have 0:07:53.080 --> 0:07:57.080 deep liquid funding markets, deep liquid derivatives markets, in order 0:07:57.400 --> 0:07:59.800 for someone to hedge that risk, you tend to get 0:07:59.840 --> 0:08:03.440 better outcomes and lower yields because of that. So you know, 0:08:03.480 --> 0:08:06.320 we did a study I actually when I was back 0:08:06.360 --> 0:08:09.040 at Credit Sueez, I did something actually for the for 0:08:09.080 --> 0:08:13.040 a World Bank study about what is liquidity and just 0:08:13.080 --> 0:08:16.440 about every single OECD government bond market in the world. 0:08:16.720 --> 0:08:19.360 And what you determined is bid offers were tightest when 0:08:19.400 --> 0:08:22.480 you had deep in liquid funding markets like repo and 0:08:22.520 --> 0:08:24.880 when you had derivative markets. So you look at Italy 0:08:25.360 --> 0:08:28.800 that basically didn't have a derivative market that was particularly 0:08:28.840 --> 0:08:32.920 deep in liquid versus France, which did, and a Spain 0:08:32.960 --> 0:08:36.360 that did. Actually, so Spanish spreads were actually tighter than 0:08:36.400 --> 0:08:39.240 Italian spreads, not that the yield levels might have been 0:08:39.280 --> 0:08:42.920 the same, righting, But the difference is those deep liquid 0:08:43.160 --> 0:08:46.600 like ancillary markets around things matter, and that's where the 0:08:46.720 --> 0:08:49.400 US is unlike any other country in the world, because 0:08:49.400 --> 0:08:52.800 we have all of those things in abundance that very 0:08:52.840 --> 0:08:55.679 few other markets have, you know, And I think that's 0:08:55.720 --> 0:08:57.959 one reason why it's going to be difficult for people 0:08:58.120 --> 0:09:01.400 not to be involved with treasuries, either as a liability 0:09:01.400 --> 0:09:04.000 management tool or as a trading instrument. 0:09:05.120 --> 0:09:07.480 Uh well, oh, Mellie, please, I was just going to add, 0:09:07.480 --> 0:09:10.440 I think just to emphasize, you know, it is long 0:09:10.559 --> 0:09:14.680 term how to think about yield's long term nominal GDP growth, 0:09:14.960 --> 0:09:18.160 but there's a lot of uncertainty about that growth and 0:09:18.240 --> 0:09:21.160 that comes and you know, that fluctuates, and so if 0:09:21.160 --> 0:09:25.000 you're uncertain about inflation, even if you have an expected 0:09:25.040 --> 0:09:28.120 path of inflation, if it's high, it might be more volatile. 0:09:28.559 --> 0:09:32.000 Or if you're uncertain about policies, any kind of policy 0:09:32.040 --> 0:09:35.200 either you know, whether you're going to support the dollar 0:09:35.440 --> 0:09:38.720 or you're going to support the US as a safe haven, 0:09:38.920 --> 0:09:43.120 or you're going to support debt or try to reduce debt. 0:09:43.160 --> 0:09:46.080 That adds uncertainty. So then treasury is you know, like 0:09:46.120 --> 0:09:49.040 in long long run it is nominal GDP, but in 0:09:49.080 --> 0:09:51.640 the meantime you're kind of going to fluctuate what these 0:09:52.640 --> 0:09:55.440 we call premiums or discounts, you know, depending on how 0:09:55.520 --> 0:09:58.319 much uncertainty there is about that. I tend to think 0:09:58.320 --> 0:10:00.560 there's a fair amount of uncertainty about that. Right now. 0:10:00.840 --> 0:10:03.240 Can you convince Joe that there is such a thing 0:10:03.240 --> 0:10:06.480 as the term premium? 0:10:06.600 --> 0:10:11.720 Well, yes, because so because if you define term premium 0:10:12.520 --> 0:10:18.439 as the expectations hypothesis less, whatever the current yield is, 0:10:18.480 --> 0:10:21.320 there's a residual, and that is a term premium. Then 0:10:21.360 --> 0:10:24.520 you just try to define. You try to use things 0:10:24.520 --> 0:10:28.280 you know about to explain the residual, but there's always 0:10:28.280 --> 0:10:32.760 something left, and that, to me is a term premium empirically. Empirically, 0:10:33.200 --> 0:10:34.560 I don't know if I'm going to convince you. 0:10:34.800 --> 0:10:37.120 I think I called it on Bloomberg Radio. Actually I 0:10:37.160 --> 0:10:41.600 called it the dark matter of the treasury market. Right, 0:10:41.679 --> 0:10:44.439 that term premium must exist. The question is do we 0:10:44.880 --> 0:10:45.720 measure it properly? 0:10:45.880 --> 0:10:46.000 Right? 0:10:46.280 --> 0:10:48.600 And that's the art of it as opposed to the 0:10:48.600 --> 0:10:49.920 science of term premium. 0:10:50.000 --> 0:10:51.840 So I like the easiest possible way to do this, 0:10:51.880 --> 0:10:55.000 which is just to ask people what they think short 0:10:55.040 --> 0:10:56.800 rates are going to be of a long run and 0:10:56.840 --> 0:10:58.960 what long term rates are going to be tomorrow, and 0:10:59.000 --> 0:11:02.520 the Philly Fad does this recorder and there is as 0:11:03.000 --> 0:11:06.040 the Philly Fed. Okay, so they just ask economists to 0:11:06.080 --> 0:11:08.040 make predictions as to what they think this that or 0:11:08.040 --> 0:11:09.280 the other thing I'm going to do. And there's like 0:11:09.320 --> 0:11:11.199 inflation and GDP growth and all these other things. But 0:11:11.240 --> 0:11:13.520 once a year, I think the first quarter, so we 0:11:13.559 --> 0:11:16.720 probably get that either now or soon. They ask tenure 0:11:16.880 --> 0:11:19.640 average teable yields, and then they also ask about the 0:11:19.640 --> 0:11:21.719 tenure yield, and so you're just literally asking people. There's 0:11:21.720 --> 0:11:23.000 a lot of bells and whistles you can put on 0:11:23.040 --> 0:11:25.640 these models, and some of the models with bells and 0:11:25.640 --> 0:11:28.480 whistles incorporate the survey data. Some people just look only 0:11:28.480 --> 0:11:31.000 at the survey data. Some people do just the modeling. 0:11:31.280 --> 0:11:34.520 But in all these cases there's a residual doesn't mean 0:11:34.520 --> 0:11:35.240 it's positive. 0:11:35.880 --> 0:11:38.640 Is the really key thing? Term premium can be negative. 0:11:39.600 --> 0:11:41.200 You can see why I'm unsatisfied. 0:11:41.440 --> 0:11:43.800 Yeah, like this is the thing is dark matter. 0:11:44.440 --> 0:11:47.640 They ask these surveys, yeah, which doesn't really like they 0:11:47.679 --> 0:11:50.960 ask they ask a random survey. Sometimes it gains negative. 0:11:51.760 --> 0:11:55.199 You can see why, Like I'm skeptical, Like, yeah, I'm 0:11:55.200 --> 0:11:56.480 not totally satisfied by any of this. 0:11:56.559 --> 0:11:58.400 No, there's a difference between the two year yield and 0:11:58.400 --> 0:12:01.520 the ten year yields, so therefore that difference also true. 0:12:02.040 --> 0:12:07.800 That could be the expectations of But you can write 0:12:07.840 --> 0:12:11.200 down what you think or a survey of what you 0:12:11.240 --> 0:12:13.760 think is between the two and ten and there's usually 0:12:13.800 --> 0:12:16.640 a residual and can be positive or negative. 0:12:16.880 --> 0:12:18.280 And having got we can. 0:12:18.160 --> 0:12:23.280 Often be explained correlated with things like inflation, expectations. 0:12:22.520 --> 0:12:25.720 Or other kinds of uncertain I tell you from experience 0:12:25.720 --> 0:12:26.760 with both dark matter. 0:12:26.559 --> 0:12:29.800 And turn pre josh was an actual. 0:12:31.520 --> 0:12:36.000 Both deeply unsatisfying it with dark matter in the from 0:12:36.000 --> 0:12:37.959 the physics perspective, well, we. 0:12:37.920 --> 0:12:38.520 Don't know what it is. 0:12:39.160 --> 0:12:43.480 There were attempts to explain it away in various like 0:12:43.840 --> 0:12:46.120 trying to hang on to the old way we think 0:12:46.160 --> 0:12:47.640 about the world is full of stuff that we can 0:12:47.679 --> 0:12:49.959 touch and see, but those never worked and there's just 0:12:50.000 --> 0:12:51.760 too much of it. And then don't even give me 0:12:51.760 --> 0:12:53.920 a start on dark energy, which is the opposite, right, 0:12:53.960 --> 0:12:58.040 And so I worked for for someone Hopkins years ago 0:12:58.400 --> 0:13:01.040 who for his PhD thesy it was told to confirm 0:13:01.080 --> 0:13:03.760 other experiments to measure the size and shape of the 0:13:03.840 --> 0:13:05.600 universe and part of that was weighing it. And so 0:13:05.640 --> 0:13:08.160 he did that experiment using supernova, which is a different 0:13:08.160 --> 0:13:09.360 way to do there's lots of with different ways to 0:13:09.360 --> 0:13:13.560 do things. Got a negative number, super unsatisfying negative mass 0:13:13.600 --> 0:13:15.880 density of the universe, which he immediately say like, okay, 0:13:15.880 --> 0:13:17.240 well this was a waste. Why did I spend two 0:13:17.280 --> 0:13:19.360 years doing this? Instead he ran with it and it 0:13:19.360 --> 0:13:21.320 turned out it was super real and it got a 0:13:21.320 --> 0:13:24.040 Nobel Prize from that outcome, which I'm not saying we'll 0:13:24.040 --> 0:13:29.240 come from term premium. Well, but sometimes the deeply unsatisfying 0:13:29.280 --> 0:13:31.120 thing is the more you dig into it, the more 0:13:31.160 --> 0:13:33.439 it's real. And I think that any way you slice 0:13:34.120 --> 0:13:37.559 that information, either literally asking people or trying to model 0:13:37.600 --> 0:13:40.400 what the market's telling you in some super sophisticated way, 0:13:40.440 --> 0:13:42.280 you always come up with a residual. Now, the question 0:13:42.320 --> 0:13:44.520 is what is that term premium telling you? And can 0:13:44.559 --> 0:13:46.640 you find consistent ways to measure it and track it? 0:13:46.920 --> 0:13:50.040 And this positive and negative thing is clearly the case, 0:13:50.400 --> 0:13:53.480 and you know there's different microeconomic ways to explain why 0:13:53.520 --> 0:13:55.000 that should or should not be true. It really comes 0:13:55.000 --> 0:13:59.200 down to uncertainty. So and is the uncertainty correlated with yields. 0:13:59.360 --> 0:14:01.200 So if I don't know what's going to happen in 0:14:01.200 --> 0:14:04.240 the future to the economy, is that uncertainly greater or 0:14:04.360 --> 0:14:06.640 lesser when the rates go up or down and that 0:14:06.880 --> 0:14:08.880 naturally generates these dislocations. 0:14:25.240 --> 0:14:28.000 Can you talk about the existence of something else, which 0:14:28.040 --> 0:14:31.920 is bond vigilantes? So we just heard teleb talk about 0:14:31.920 --> 0:14:34.920 the deficit, and yet I feel like the notion that 0:14:34.960 --> 0:14:37.640 there are investors that you know, wake up one morning 0:14:37.720 --> 0:14:40.440 and say, oh, wait, I'm really worried about the deficit. 0:14:40.480 --> 0:14:42.640 Today's the day I'm gonna, you know, sell all my 0:14:42.720 --> 0:14:48.000 bond exposure. That probably doesn't happen that often. And then secondly, Nelly, 0:14:48.080 --> 0:14:50.200 I would be very interested in your take on this. 0:14:50.320 --> 0:14:52.080 But you know, when you were at Treasury, did you 0:14:52.160 --> 0:14:55.200 sit in the office going like, oh, the bond vigilantes 0:14:55.200 --> 0:14:57.520 are going to get me. I better be disciplined with 0:14:57.680 --> 0:14:58.760 my issuance schedule. 0:15:00.920 --> 0:15:03.160 Was that a question for everyone? 0:15:03.240 --> 0:15:06.200 Okay, Well, let me just no, I didn't sit there 0:15:06.440 --> 0:15:09.080 with with that, And I was at the Fed for 0:15:09.200 --> 0:15:11.760 thirty years before I went to Treasury. And you do 0:15:11.880 --> 0:15:15.400 care a lot about bond fields. I mean, it's sort 0:15:15.440 --> 0:15:18.840 of fundamental to the way monetary policy works. It's fundamental 0:15:18.920 --> 0:15:21.960 to the way you issue treasure, but you don't think 0:15:22.120 --> 0:15:25.520 about it on a daily basis, but it really influences 0:15:25.560 --> 0:15:30.640 how you view events like these scarce events and if 0:15:31.520 --> 0:15:34.960 these like you know, shocks that you weren't which by 0:15:35.000 --> 0:15:38.800 definition you're not expecting. But if you've got a system 0:15:38.920 --> 0:15:43.000 where there's a lot of leverage and you have an 0:15:43.080 --> 0:15:47.280 unexpected shock, people are going to make trades and change 0:15:47.280 --> 0:15:50.960 positions and that's when you worry. But it's not an 0:15:51.120 --> 0:15:55.880 ongoing thing. So those kinds of to sort of prevent that, 0:15:56.000 --> 0:15:58.320 you spend a lot of time as a policy maker, 0:15:58.880 --> 0:16:01.320 where do we understand where the leverages and how can 0:16:01.360 --> 0:16:03.880 we keep it manageable and make sure they can keep 0:16:03.920 --> 0:16:07.480 their funding. This is goods to the point of funding 0:16:07.520 --> 0:16:11.080 being you know, fundamental to being able to trade treasuries. 0:16:11.400 --> 0:16:15.120 So it's kind of a bigger picture, but it's not 0:16:15.200 --> 0:16:19.400 a daily thing. I don't know, but but it's important. 0:16:19.440 --> 0:16:23.120 I actually think it's a really important market disciplining mechanism. 0:16:23.200 --> 0:16:25.760 Yeah, the level of debt matters, right, So the bod 0:16:25.800 --> 0:16:28.640 fingilantees like, there's no group of people who get together 0:16:28.680 --> 0:16:30.080 at a bar and say, hey, We're. 0:16:29.920 --> 0:16:30.840 Going to go sell treasures. 0:16:30.920 --> 0:16:34.120 Today's the day, Yeah, exactly, like hey, tomorrow, you know 0:16:34.160 --> 0:16:36.000 the debt is going to be too big, Let's just 0:16:36.080 --> 0:16:40.840 sell treasuries. The issue, I think is manifests itself in 0:16:40.960 --> 0:16:43.920 multiple ways. And one is this this steepening of the yield. 0:16:43.800 --> 0:16:44.520 Curve that we've seen. 0:16:44.600 --> 0:16:47.560 Right in a normal environment, you'd expect that anyway if 0:16:47.560 --> 0:16:49.600 the Fed Reserve was expected to cut rags, which it 0:16:49.640 --> 0:16:52.760 certainly has. But at the same time, you know, you 0:16:52.840 --> 0:16:55.840 do have a growing fear that when you have two 0:16:55.880 --> 0:16:58.840 trillion two point five trillion dollar deficits every year and 0:16:58.880 --> 0:17:01.640 we wind up in a a in a debt trap 0:17:01.720 --> 0:17:04.560 where interest rates and the interest on the debt ends 0:17:04.680 --> 0:17:09.640 up being so large that the fiscal agents in Washington 0:17:09.720 --> 0:17:12.159 will have to do something about it. But the market 0:17:12.359 --> 0:17:15.480 hasn't yet forced them into it. And I think that 0:17:15.480 --> 0:17:20.239 that's that forcing the government to actually act and do 0:17:20.320 --> 0:17:23.560 something is really what might have to be the impetus 0:17:23.560 --> 0:17:25.560 for you to actually get some kind of fiscal response. 0:17:25.760 --> 0:17:30.120 The challenge is political, right, and that is because fifty 0:17:30.160 --> 0:17:33.480 plus percent of our debt is interesting of excuming of 0:17:33.480 --> 0:17:38.080 our spending by the federal government is Medicare, social Security, 0:17:38.400 --> 0:17:42.160 and interest on the debt. Well, those are hard things 0:17:42.400 --> 0:17:45.000 to contend with, right, It's really really difficult. 0:17:45.160 --> 0:17:47.840 So I believe in bond vigilantes is not in a 0:17:47.960 --> 0:17:49.800 US context. And what I mean by that is when 0:17:49.800 --> 0:17:52.640 we talk about vigilantes, we're really referring to the nineties 0:17:53.119 --> 0:17:56.439 EM crisis, where the concern was I'm not going to 0:17:56.440 --> 0:17:58.560 get my dollar. There were dollar bonds. I'm not going 0:17:58.600 --> 0:18:00.719 to get these dollars back because the party to this 0:18:00.760 --> 0:18:02.840 debt doesn't have them and can't get them at a 0:18:02.840 --> 0:18:05.520 reasonable price, and so the bond will default. And therefore 0:18:05.520 --> 0:18:07.960 I want to get ahead of this default because you 0:18:08.040 --> 0:18:09.639 know the classic bank run. I want to get out 0:18:09.680 --> 0:18:12.959 before everyone else is before I'm stuck. In the US context, 0:18:13.040 --> 0:18:15.040 you don't have that problem. So the question is who's 0:18:15.040 --> 0:18:16.160 going to wake up and selling why? 0:18:16.240 --> 0:18:17.440 I'm saying why again. 0:18:18.040 --> 0:18:20.639 And they will sell because they are forced to sell. 0:18:20.960 --> 0:18:24.240 And we've had the Repo vigilantes so to speak, strike 0:18:24.440 --> 0:18:27.280 in twenty twenty and in twenty twenty five, and they 0:18:27.280 --> 0:18:29.160 were forced to sell for a variety of reasons. One 0:18:29.200 --> 0:18:31.880 was just the increase in the volatility market in general, 0:18:32.840 --> 0:18:35.160 and then there were margin calls, especially in twenty twenty 0:18:35.200 --> 0:18:39.439 where they were de levered, and the question then it 0:18:39.440 --> 0:18:42.120 becomes like are we heading for that kind of scenario? 0:18:42.240 --> 0:18:44.800 And the reason why the debt growth matters is because 0:18:44.840 --> 0:18:48.640 these repo vigilantis are not worried about the credit. 0:18:48.359 --> 0:18:49.240 Of the bonds they hold. 0:18:49.359 --> 0:18:51.879 They're worried no one will buy them from them because 0:18:51.880 --> 0:18:55.080 the banking system or the dealer of the bank affiliated 0:18:55.119 --> 0:18:57.159 dealers that are to be supposed to be on the 0:18:57.160 --> 0:19:00.760 other side of these trades won't have capacity, and every 0:19:00.760 --> 0:19:02.800 trade's going to keep ticking cheaper and cheaper and cheaper, 0:19:02.840 --> 0:19:04.960 and they're going to be in a difficult like sort 0:19:05.000 --> 0:19:07.359 of mark to market situation. But that's a very different 0:19:07.359 --> 0:19:10.840 set of considerations, and it's sort of related to overall 0:19:10.920 --> 0:19:12.639 growth in the debt, but it's also related to the 0:19:12.680 --> 0:19:14.720 structure of the market at how it places. 0:19:15.160 --> 0:19:17.720 Since we're here and we're just clarifying things for me 0:19:17.840 --> 0:19:21.919 that I've always wanted to, you know, learn about for years, 0:19:22.600 --> 0:19:25.080 over ten years of been sitting at my Bloomberg terminal. 0:19:25.320 --> 0:19:26.960 Every once in a while you get a red headline 0:19:27.400 --> 0:19:30.679 and it's talked about like bid to cover in the tail, 0:19:31.480 --> 0:19:33.520 and I can never tell if any of these auction 0:19:33.680 --> 0:19:36.560 statistics really make it difference, like oh, terrible auction and 0:19:36.600 --> 0:19:41.320 there's always a good auction. How should I consume that information? 0:19:41.440 --> 0:19:43.639 How useful is that or for whom is that useful? 0:19:43.880 --> 0:19:47.199 So so we actually started just earlier this year in 0:19:47.200 --> 0:19:50.560 Bloomberg Intelligence having a grading methodology where we actually grade 0:19:50.600 --> 0:19:55.840 these from DTA A plus, and you know, we look 0:19:55.880 --> 0:19:58.000 at a variety of the bidding metrics in order to 0:19:58.040 --> 0:20:01.000 do that and how they compare it to history. So 0:20:01.080 --> 0:20:02.960 one of the big things that you've seen, and this 0:20:03.080 --> 0:20:07.320 goes to Josh's issues about structure, you go back about 0:20:07.320 --> 0:20:10.720 ten twelve years and you saw that primary dealers were 0:20:10.720 --> 0:20:16.000 the biggest buyers of coon coupon debt. Today they're the smallest. 0:20:16.440 --> 0:20:19.560 So you actually in the recent auctions, for example that 0:20:19.600 --> 0:20:22.280 we just had this week with a seven year auction 0:20:22.359 --> 0:20:26.800