Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to a very special episode of the
Speaker 2: au Thoughts podcast. I'm Tracy Alloway.
Speaker 3: And I'm Jill.
Speaker 4: Why isn't thal So what you are.
Speaker 2: About to hear has the very very modest title of
Speaker 2: the best ever panel on the world's most important market,
Speaker 2: that is the US Treasury market. Of course, this was
Speaker 2: recorded live at our New York event on June twenty sixth.
Speaker 4: That's right. We had our recent oud Loots live event
Speaker 4: in New York, and there's so much going on in
Speaker 4: the treasury markets. There's questions about raids, there's questions about
Speaker 4: foreign demand, there's questions about liquidity and the capacity of
Speaker 4: existing treasury market infrastructure to handle all of the volume
Speaker 4: of debt out there. So we wanted together some of
Speaker 4: our favorite people to actually understand what's going on.
Speaker 2: Yep, who's going to buy all the bonds? And we
Speaker 2: did it. Indeed, have an absolutely amazing panel. So we
Speaker 2: had Nellie Lang, she is a senior fellow over at
Speaker 2: the Brookings Institution. She is also the former Undersecretary of
Speaker 2: the Treasury for Domestic Finance. We had Ira Jersey, who
Speaker 2: you might remember from a previous episode. He is the
Speaker 2: chief US interest rate strategist over at Bloomberg Intelligence. And finally,
Speaker 2: we had an odd thoughts favorite Josh Younger. He is
Speaker 2: a lecturer at Columbia University, among many other things. So
Speaker 2: we hope you enjoy take a listen.
Speaker 4: So is anyone worried about who's going to buy the debt?
Speaker 3: Who goes first for that one? Well, I.
Speaker 5: Mean, I guess I'll start. I'm not worried about who's
Speaker 5: going to buy the debt. You know, when we think
Speaker 5: about markets generally, and especially markets for sovereign debt of
Speaker 5: large countries that are relatively liquid, there will be a
Speaker 5: buyer now the price might change, And I think that's
Speaker 5: one of the things we have seen somewhat in recent weeks.
Speaker 5: When you have somewhat of a slowing economy in the US,
Speaker 5: you certainly see like two year yields have actually gone down,
Speaker 5: you know, better part of fifty basis points over the
Speaker 5: near term, but the long end hasn't done very much
Speaker 5: at all. And I think that that is at least
Speaker 5: in part and indication that there are some people who
Speaker 5: are a little bit scared to buy that debt without
Speaker 5: having some type of premium put onto it, so it'll
Speaker 5: get bought.
Speaker 3: The question is at what price?
Speaker 5: And that's different, right, Like, I'm an investment strategist, I'm
Speaker 5: not a policymaker, right, and I think that there's some
Speaker 5: people who kind of mess that up with what like
Speaker 5: our job is. When Nelly was at the Treasury Department,
Speaker 5: she had a much different view of the world that
Speaker 5: she had to do as opposed to what we do
Speaker 5: as investors.
Speaker 2: Well, I mean, on that note, it is true that
Speaker 2: we have more i would say, price sensitive buyers in
Speaker 2: the market than we used to. Right, So, we used
Speaker 2: to have a lot of central banks, a lot of
Speaker 2: sovereign wealth funds. They're still there, but compared to stick buyers,
Speaker 2: retail like that has grown a lot more. Nellie, does
Speaker 2: that change the way you think about debt versus you
Speaker 2: know some years.
Speaker 6: Ago absolutely so said prices will adjust, there will be
Speaker 6: a buyer. But it used to be decades ago we
Speaker 6: just had a much more stable investor base central banks,
Speaker 6: foreign funds. Now it's like the non bank what we
Speaker 6: would call the non bank financial institutions. It's hedge funds
Speaker 6: for various reasons, private funds who use treasuries for liquidity
Speaker 6: risk management. So the minute things get volatile, they'll want
Speaker 6: to sell treasuries to help manage their own positions. And
Speaker 6: so the investor base has changed. There will be buyers,
Speaker 6: but it could change the price and change the way
Speaker 6: prices fluctuate. You know, there just can be much more
Speaker 6: volatility given the changing investor base. And that's something that Treasury,
Speaker 6: who has to issue the debt regularly. We when I
Speaker 6: was at Treasury, probably two hundred and fifty auctions a year.
Speaker 6: They think about that, and it does affect how you
Speaker 6: think about bills versus longer term coupons and all that.
Speaker 7: I guess I would it's definitely saying the same thing
Speaker 7: I should start with. I thought i'd get away from
Speaker 7: disclaimers when I left the FED, but I have to say, hey,
Speaker 7: disclaimer which is this is not investment advice and place
Speaker 7: that has lots of positions, and nothing I say should
Speaker 7: implicate what positions we may have or not have that said,
Speaker 7: I you know, I think it's a similar way to
Speaker 7: ask the question is why are they buying the debt
Speaker 7: because the market's going to clear the price. We may
Speaker 7: or may not like that price, but prices used to
Speaker 7: fluctuate like all over time for various reasons. I mean,
Speaker 7: during the Civil War we had a captive demand base
Speaker 7: because if you wanted to be a bank, you had
Speaker 7: to buy treasuries, and yet the price moved right, And
Speaker 7: so for me, it's are you buying a security to
Speaker 7: hedge a liability that is of similar duration to the
Speaker 7: thing you're buying. Are you in it for the long haul?
Speaker 7: And classic examples like a life insurance company which has
Speaker 7: very long term longevity indexed is the term of art, right,
Speaker 7: It's like, as long as you people are alive, there's
Speaker 7: going to be life insurance. For companies, they have to
Speaker 7: buy debt of similar length and they're going to be
Speaker 7: very stable. They might be price sensitive, but probably less so.
Speaker 7: And at the end of the day, they have this
Speaker 7: liability that has to get funded. Banks to the same
Speaker 7: extent have these very long term liabilities deposits or long
Speaker 7: term liabilities, as we talked about that on one of
Speaker 7: the episodes. So they need long term assets to hedge
Speaker 7: the long term liabilities. Because you have bank accounts, you
Speaker 7: can get your money back whenever you want, but you
Speaker 7: tend not to, right, So that's a long term liability.
Speaker 7: A hedge fund is not in it for ten years,
Speaker 7: because that is not the nature of the business. They
Speaker 7: are responding to price signals and relative value. Treasury trading
Speaker 7: is really just a response to price signals where the
Speaker 7: market is attempting to find the lowest cost buyer. There's
Speaker 7: this great book from the nineteenth century which is inspiration
Speaker 7: for Freeman on that a Freeman Night. But like it's
Speaker 7: an interesting story which called Feeding Paris, which is by
Speaker 7: Bustiacht and a French economist, and he was saying, if
Speaker 7: one person was responsible for feeding Paris, everyone would die,
Speaker 7: because it's impossible feed a million people if you're making
Speaker 7: all of these decisions on your own. So price signals
Speaker 7: get the food to where it has to go when
Speaker 7: it has to go there. And so like the miracle
Speaker 7: of the price mechanism is the fact that Paris wakes
Speaker 7: up every morning and has food eat. And it's still true, right,
Speaker 7: I mean, cities are complicated, and so in the treasury
Speaker 7: market case, the feeding Paris equivalent is basis trades and
Speaker 7: swap spread trades and every instance of buying a security
Speaker 7: with levered money, repo and things like that, and hedging
Speaker 7: the risk with the derivative where the price difference between
Speaker 7: those things makes that worthwhile. And that's also a signal
Speaker 7: that we don't have enough of those liability hedgers who
Speaker 7: are in it for the long haul. We have to
Speaker 7: find somebody else.
Speaker 4: What are the data points we should be looking at,
Speaker 4: because if I look at the ten year yield, you know,
Speaker 4: it's something to do with the long term trajectory of
Speaker 4: monetary policy, and that's going to fluctuate for various reasons
Speaker 4: inflation growth, et cetera. If we want to capture some
Speaker 4: of these other dynamics such as the change and who
Speaker 4: are the buyers, or just the desire to even own
Speaker 4: US dollar denominated debt assets, what should what else should
Speaker 4: we be looking at?
Speaker 5: Well, So the way that I look at US treasuries,
Speaker 5: assuming that there's not real credit risk, right, yeah, I would,
Speaker 5: I would still I would still argue that there's still
Speaker 5: not credit risk more than a couple of basis points
Speaker 5: that's embedded in the current yield of say the ten
Speaker 5: year treasury, then ten year treasuries.
Speaker 3: Again, the way that I look at it, it have to
Speaker 3: be somewhere around nominal GDP growth.
Speaker 5: Right, So basically at the trajectory of what is the
Speaker 5: growth rate of the country in the longer run, and
Speaker 5: that's what the market is going to spit out, plus
Speaker 5: or minus, like you said, some kind of liquidity or
Speaker 5: either premium or discount. Now I would argue that with treasuries.
Speaker 5: To Josh's point, right there is that markets that have
Speaker 5: deep liquid funding markets, deep liquid derivatives markets, in order
Speaker 5: for someone to hedge that risk, you tend to get
Speaker 5: better outcomes and lower yields because of that. So you know,
Speaker 5: we did a study I actually when I was back
Speaker 5: at Credit Sueez, I did something actually for the for
Speaker 5: a World Bank study about what is liquidity and just
Speaker 5: about every single OECD government bond market in the world.
Speaker 5: And what you determined is bid offers were tightest when
Speaker 5: you had deep in liquid funding markets like repo and
Speaker 5: when you had derivative markets. So you look at Italy
Speaker 5: that basically didn't have a derivative market that was particularly
Speaker 5: deep in liquid versus France, which did, and a Spain
Speaker 5: that did. Actually, so Spanish spreads were actually tighter than
Speaker 5: Italian spreads, not that the yield levels might have been
Speaker 5: the same, righting, But the difference is those deep liquid
Speaker 5: like ancillary markets around things matter, and that's where the
Speaker 5: US is unlike any other country in the world, because
Speaker 5: we have all of those things in abundance that very
Speaker 5: few other markets have, you know, And I think that's
Speaker 5: one reason why it's going to be difficult for people
Speaker 5: not to be involved with treasuries, either as a liability
Speaker 5: management tool or as a trading instrument.
Speaker 6: Uh well, oh, Mellie, please, I was just going to add,
Speaker 6: I think just to emphasize, you know, it is long
Speaker 6: term how to think about yield's long term nominal GDP growth,
Speaker 6: but there's a lot of uncertainty about that growth and
Speaker 6: that comes and you know, that fluctuates, and so if
Speaker 6: you're uncertain about inflation, even if you have an expected
Speaker 6: path of inflation, if it's high, it might be more volatile.
Speaker 6: Or if you're uncertain about policies, any kind of policy
Speaker 6: either you know, whether you're going to support the dollar
Speaker 6: or you're going to support the US as a safe haven,
Speaker 6: or you're going to support debt or try to reduce debt.
Speaker 6: That adds uncertainty. So then treasury is you know, like
Speaker 6: in long long run it is nominal GDP, but in
Speaker 6: the meantime you're kind of going to fluctuate what these
Speaker 6: we call premiums or discounts, you know, depending on how
Speaker 6: much uncertainty there is about that. I tend to think
Speaker 6: there's a fair amount of uncertainty about that. Right now.
Speaker 2: Can you convince Joe that there is such a thing
Speaker 2: as the term premium?
Speaker 6: Well, yes, because so because if you define term premium
Speaker 6: as the expectations hypothesis less, whatever the current yield is,
Speaker 6: there's a residual, and that is a term premium. Then
Speaker 6: you just try to define. You try to use things
Speaker 6: you know about to explain the residual, but there's always
Speaker 6: something left, and that, to me is a term premium empirically. Empirically,
Speaker 6: I don't know if I'm going to convince you.
Speaker 5: I think I called it on Bloomberg Radio. Actually I
Speaker 5: called it the dark matter of the treasury market. Right,
Speaker 5: that term premium must exist. The question is do we
Speaker 5: measure it properly?
Speaker 3: Right?
Speaker 5: And that's the art of it as opposed to the
Speaker 5: science of term premium.
Speaker 7: So I like the easiest possible way to do this,
Speaker 7: which is just to ask people what they think short
Speaker 7: rates are going to be of a long run and
Speaker 7: what long term rates are going to be tomorrow, and
Speaker 7: the Philly Fad does this recorder and there is as
Speaker 7: the Philly Fed. Okay, so they just ask economists to
Speaker 7: make predictions as to what they think this that or
Speaker 7: the other thing I'm going to do. And there's like
Speaker 7: inflation and GDP growth and all these other things. But
Speaker 7: once a year, I think the first quarter, so we
Speaker 7: probably get that either now or soon. They ask tenure
Speaker 7: average teable yields, and then they also ask about the
Speaker 7: tenure yield, and so you're just literally asking people. There's
Speaker 7: a lot of bells and whistles you can put on
Speaker 7: these models, and some of the models with bells and
Speaker 7: whistles incorporate the survey data. Some people just look only
Speaker 7: at the survey data. Some people do just the modeling.
Speaker 7: But in all these cases there's a residual doesn't mean
Speaker 7: it's positive.
Speaker 3: Is the really key thing? Term premium can be negative.
Speaker 4: You can see why I'm unsatisfied.
Speaker 3: Yeah, like this is the thing is dark matter.
Speaker 4: They ask these surveys, yeah, which doesn't really like they
Speaker 4: ask they ask a random survey. Sometimes it gains negative.
Speaker 4: You can see why, Like I'm skeptical, Like, yeah, I'm
Speaker 4: not totally satisfied by any of this.
Speaker 5: No, there's a difference between the two year yield and
Speaker 5: the ten year yields, so therefore that difference also true.
Speaker 6: That could be the expectations of But you can write
Speaker 6: down what you think or a survey of what you
Speaker 6: think is between the two and ten and there's usually
Speaker 6: a residual and can be positive or negative.
Speaker 3: And having got we can.
Speaker 6: Often be explained correlated with things like inflation, expectations.
Speaker 7: Or other kinds of uncertain I tell you from experience
Speaker 7: with both dark matter.
Speaker 2: And turn pre josh was an actual.
Speaker 7: Both deeply unsatisfying it with dark matter in the from
Speaker 7: the physics perspective, well, we.
Speaker 3: Don't know what it is.
Speaker 7: There were attempts to explain it away in various like
Speaker 7: trying to hang on to the old way we think
Speaker 7: about the world is full of stuff that we can
Speaker 7: touch and see, but those never worked and there's just
Speaker 7: too much of it. And then don't even give me
Speaker 7: a start on dark energy, which is the opposite, right,
Speaker 7: And so I worked for for someone Hopkins years ago
Speaker 7: who for his PhD thesy it was told to confirm
Speaker 7: other experiments to measure the size and shape of the
Speaker 7: universe and part of that was weighing it. And so
Speaker 7: he did that experiment using supernova, which is a different
Speaker 7: way to do there's lots of with different ways to
Speaker 7: do things. Got a negative number, super unsatisfying negative mass
Speaker 7: density of the universe, which he immediately say like, okay,
Speaker 7: well this was a waste. Why did I spend two
Speaker 7: years doing this? Instead he ran with it and it
Speaker 7: turned out it was super real and it got a
Speaker 7: Nobel Prize from that outcome, which I'm not saying we'll
Speaker 7: come from term premium. Well, but sometimes the deeply unsatisfying
Speaker 7: thing is the more you dig into it, the more
Speaker 7: it's real. And I think that any way you slice
Speaker 7: that information, either literally asking people or trying to model
Speaker 7: what the market's telling you in some super sophisticated way,
Speaker 7: you always come up with a residual. Now, the question
Speaker 7: is what is that term premium telling you? And can
Speaker 7: you find consistent ways to measure it and track it?
Speaker 7: And this positive and negative thing is clearly the case,
Speaker 7: and you know there's different microeconomic ways to explain why
Speaker 7: that should or should not be true. It really comes
Speaker 7: down to uncertainty. So and is the uncertainty correlated with yields.
Speaker 7: So if I don't know what's going to happen in
Speaker 7: the future to the economy, is that uncertainly greater or
Speaker 7: lesser when the rates go up or down and that
Speaker 7: naturally generates these dislocations.
Speaker 2: Can you talk about the existence of something else, which
Speaker 2: is bond vigilantes? So we just heard teleb talk about
Speaker 2: the deficit, and yet I feel like the notion that
Speaker 2: there are investors that you know, wake up one morning
Speaker 2: and say, oh, wait, I'm really worried about the deficit.
Speaker 2: Today's the day I'm gonna, you know, sell all my
Speaker 2: bond exposure. That probably doesn't happen that often. And then secondly, Nelly,
Speaker 2: I would be very interested in your take on this.
Speaker 2: But you know, when you were at Treasury, did you
Speaker 2: sit in the office going like, oh, the bond vigilantes
Speaker 2: are going to get me. I better be disciplined with
Speaker 2: my issuance schedule.
Speaker 3: Was that a question for everyone?
Speaker 6: Okay, Well, let me just no, I didn't sit there
Speaker 6: with with that, And I was at the Fed for
Speaker 6: thirty years before I went to Treasury. And you do
Speaker 6: care a lot about bond fields. I mean, it's sort
Speaker 6: of fundamental to the way monetary policy works. It's fundamental
Speaker 6: to the way you issue treasure, but you don't think
Speaker 6: about it on a daily basis, but it really influences
Speaker 6: how you view events like these scarce events and if
Speaker 6: these like you know, shocks that you weren't which by
Speaker 6: definition you're not expecting. But if you've got a system
Speaker 6: where there's a lot of leverage and you have an
Speaker 6: unexpected shock, people are going to make trades and change
Speaker 6: positions and that's when you worry. But it's not an
Speaker 6: ongoing thing. So those kinds of to sort of prevent that,
Speaker 6: you spend a lot of time as a policy maker,
Speaker 6: where do we understand where the leverages and how can
Speaker 6: we keep it manageable and make sure they can keep
Speaker 6: their funding. This is goods to the point of funding
Speaker 6: being you know, fundamental to being able to trade treasuries.
Speaker 6: So it's kind of a bigger picture, but it's not
Speaker 6: a daily thing. I don't know, but but it's important.
Speaker 6: I actually think it's a really important market disciplining mechanism.
Speaker 5: Yeah, the level of debt matters, right, So the bod
Speaker 5: fingilantees like, there's no group of people who get together
Speaker 5: at a bar and say, hey, We're.
Speaker 3: Going to go sell treasures.
Speaker 5: Today's the day, Yeah, exactly, like hey, tomorrow, you know
Speaker 5: the debt is going to be too big, Let's just
Speaker 5: sell treasuries. The issue, I think is manifests itself in
Speaker 5: multiple ways. And one is this this steepening of the yield.
Speaker 3: Curve that we've seen.
Speaker 5: Right in a normal environment, you'd expect that anyway if
Speaker 5: the Fed Reserve was expected to cut rags, which it
Speaker 5: certainly has. But at the same time, you know, you
Speaker 5: do have a growing fear that when you have two
Speaker 5: trillion two point five trillion dollar deficits every year and
Speaker 5: we wind up in a a in a debt trap
Speaker 5: where interest rates and the interest on the debt ends
Speaker 5: up being so large that the fiscal agents in Washington
Speaker 5: will have to do something about it. But the market
Speaker 5: hasn't yet forced them into it. And I think that
Speaker 5: that's that forcing the government to actually act and do
Speaker 5: something is really what might have to be the impetus
Speaker 5: for you to actually get some kind of fiscal response.
Speaker 5: The challenge is political, right, and that is because fifty
Speaker 5: plus percent of our debt is interesting of excuming of
Speaker 5: our spending by the federal government is Medicare, social Security,
Speaker 5: and interest on the debt. Well, those are hard things
Speaker 5: to contend with, right, It's really really difficult.
Speaker 7: So I believe in bond vigilantes is not in a
Speaker 7: US context. And what I mean by that is when
Speaker 7: we talk about vigilantes, we're really referring to the nineties
Speaker 7: EM crisis, where the concern was I'm not going to
Speaker 7: get my dollar. There were dollar bonds. I'm not going
Speaker 7: to get these dollars back because the party to this
Speaker 7: debt doesn't have them and can't get them at a
Speaker 7: reasonable price, and so the bond will default. And therefore
Speaker 7: I want to get ahead of this default because you
Speaker 7: know the classic bank run. I want to get out
Speaker 7: before everyone else is before I'm stuck. In the US context,
Speaker 7: you don't have that problem. So the question is who's
Speaker 7: going to wake up and selling why?
Speaker 3: I'm saying why again.
Speaker 7: And they will sell because they are forced to sell.
Speaker 7: And we've had the Repo vigilantes so to speak, strike
Speaker 7: in twenty twenty and in twenty twenty five, and they
Speaker 7: were forced to sell for a variety of reasons. One
Speaker 7: was just the increase in the volatility market in general,
Speaker 7: and then there were margin calls, especially in twenty twenty
Speaker 7: where they were de levered, and the question then it
Speaker 7: becomes like are we heading for that kind of scenario?
Speaker 7: And the reason why the debt growth matters is because
Speaker 7: these repo vigilantis are not worried about the credit.
Speaker 3: Of the bonds they hold.
Speaker 7: They're worried no one will buy them from them because
Speaker 7: the banking system or the dealer of the bank affiliated
Speaker 7: dealers that are to be supposed to be on the
Speaker 7: other side of these trades won't have capacity, and every
Speaker 7: trade's going to keep ticking cheaper and cheaper and cheaper,
Speaker 7: and they're going to be in a difficult like sort
Speaker 7: of mark to market situation. But that's a very different
Speaker 7: set of considerations, and it's sort of related to overall
Speaker 7: growth in the debt, but it's also related to the
Speaker 7: structure of the market at how it places.
Speaker 4: Since we're here and we're just clarifying things for me
Speaker 4: that I've always wanted to, you know, learn about for years,
Speaker 4: over ten years of been sitting at my Bloomberg terminal.
Speaker 4: Every once in a while you get a red headline
Speaker 4: and it's talked about like bid to cover in the tail,
Speaker 4: and I can never tell if any of these auction
Speaker 4: statistics really make it difference, like oh, terrible auction and
Speaker 4: there's always a good auction. How should I consume that information?
Speaker 4: How useful is that or for whom is that useful?
Speaker 5: So so we actually started just earlier this year in
Speaker 5: Bloomberg Intelligence having a grading methodology where we actually grade
Speaker 5: these from DTA A plus, and you know, we look
Speaker 5: at a variety of the bidding metrics in order to
Speaker 5: do that and how they compare it to history. So
Speaker 5: one of the big things that you've seen, and this
Speaker 5: goes to Josh's issues about structure, you go back about
Speaker 5: ten twelve years and you saw that primary dealers were
Speaker 5: the biggest buyers of coon coupon debt. Today they're the smallest.
Speaker 5: So you actually in the recent auctions, for example that
Speaker 5: we just had this week with a seven year auction
Speaker 5: earlier today, we had five year yesterday, the dealers only
Speaker 5: bought about ten percent of the bonds, whereas if you
Speaker 5: went back to twenty twelve twenty thirteen would have been
Speaker 5: they would have bought forty to sixty percent of those auctions.
Speaker 5: So the bidding metrics matter, and it matters because you
Speaker 5: can see where the primary demand is coming from. And
Speaker 5: we know now that you know, dealers, because of the
Speaker 5: changes in market structure that have occurred, particularly since the
Speaker 5: institution of Basil three, are much smaller buyers, and you know,
Speaker 5: basically end users are much larger buyers, and some of
Speaker 5: those are high frequency traders or maybe people who have
Speaker 5: repo books and kind of need to fill them by
Speaker 5: getting some collateral. Well, so all of those bidding metrics matter,
Speaker 5: but the tails will show you that the market was
Speaker 5: mispriced at the time that the auction closed versus what
Speaker 5: the aggregate demand was at that auction. And that's that
Speaker 5: tail is the single most important thing to look at,
Speaker 5: followed by then some of the details in there about
Speaker 5: who was actually purchasing, and then you know how much
Speaker 5: they did for.
Speaker 2: So, since we brought up market structure, it is true
Speaker 2: that the treasury market has experienced a number of volatility
Speaker 2: events at this point, which is weird because in theory
Speaker 2: it's supposed to be a pretty boring, kind of staid,
Speaker 2: old fashioned market and it's been anything.
Speaker 3: But you're telling me that I've been boring.
Speaker 2: I'm so sorry.
Speaker 6: I'm so sorry.
Speaker 3: Well, not anymore. That's supposed to be.
Speaker 2: Supposed to be, and we have all these things that
Speaker 2: have been put in place after every single volatility event,
Speaker 2: like you know, the RRP of the standing repo facility.
Speaker 2: We just had a change to the supplementary leverage ratio
Speaker 2: to help dealer banks hold more treasuries. Why do we
Speaker 2: still seem to have these all events happening.
Speaker 3: I guess we should have them sometimes.
Speaker 7: So the idea that treasury markets never had all events,
Speaker 7: I mean, you go back to the nineties and their
Speaker 7: massive all events in like two thousand and three is
Speaker 7: a massive mortgage extension, there was a surprise seventy five basis.
Speaker 3: Point hike in the night. There's always been these events.
Speaker 7: I think the difference now is it's harder to pinpoint
Speaker 7: a fundamental source. Like usually back then you could say, oh,
Speaker 7: this was the GSEs, this was the FED hiking rates
Speaker 7: in a way that people didn't expect. Now there's like
Speaker 7: this whole process of trying to figure out why this
Speaker 7: is happening, and it tends to happen very quickly, and
Speaker 7: it tends to disrupt a lot of relationships. But like
Speaker 7: I think, in one sense, this is stuff that's been
Speaker 7: happening in the past, it's just the market is much larger,
Speaker 7: the banking system's ability to provide that offset is.
Speaker 3: Is lesser, and the.
Speaker 7: Frequency with which trades happened it's just really gone up.
Speaker 7: I mean, like the markets are very active now. But
Speaker 7: I think that's all kind of a symptom of the issue,
Speaker 7: which is it's kind of like a just in time
Speaker 7: supply version of treasure markets, which is you have dealers
Speaker 7: can't hold a lot of inventory, so they have the
Speaker 7: match trades really efficiently. It used to be if you
Speaker 7: didn't know the buyer and the seller, you just hold
Speaker 7: it overnight. Now the high frequency traders do that for
Speaker 7: them in a very efficient, fast paced way, and then
Speaker 7: the dealers are trying to get hedge funds and set
Speaker 7: through the price mechanism to hold inventory on their behalf
Speaker 7: because basis trades are basically what dealers used to do,
Speaker 7: and that's all very fragile, and so that combination of
Speaker 7: things generates these shocks because the whole that arrangement.
Speaker 3: Can collapse very quickly. But you know, at the end
Speaker 3: of the day, like the.
Speaker 7: Size of the market is growing faster than the dealers
Speaker 7: have capacity to use.
Speaker 6: No, yeah, I just to provide like a policy maker's perspective,
Speaker 6: like you just step back. There's just been so many
Speaker 6: changes in technology and then the changes in the buyer base.
Speaker 6: We talked about the structural change on who buys now
Speaker 6: versus inn So like in twenty fourteen, there was something
Speaker 6: called a flash rally and the treasury I remember that, remember,
Speaker 6: and like no one understood why the treasury yield went
Speaker 6: up and down like thirty basis points in two minutes
Speaker 6: and reversed, and it was It kind of scared the
Speaker 6: public sector, you know, the government officials like how is
Speaker 6: this possible? What is the trade? And had to do
Speaker 6: a lot with these new high frequency traders. It took
Speaker 6: a lot of time to like dissect what happened. So
Speaker 6: that was even before there was a lot of treasury debt.
Speaker 6: Now we have more treasury debt and there's just you know,
Speaker 6: the volume. But I guess I would also separate the
Speaker 6: I would make a distinction between volatility events and then
Speaker 6: market ill liquidity events, just because if the mark if
Speaker 6: news is volatile, there's new changes in the economy, you
Speaker 6: would expect treasury yields and prices to be volatile. They should,
Speaker 6: They're supposed to reflect that, and I think lot of
Speaker 6: what it's been happening recently. But the concerns are when
Speaker 6: you can't transact easily and quickly because you've pulled in
Speaker 6: more dealers that they have pulled in more than they
Speaker 6: might normally would just because of the higher volatility. So
Speaker 6: you should always get a little well, you should always
Speaker 6: get a little less liquidity when things get all little,
Speaker 6: you know, just because risk is higher. But it's when
Speaker 6: they sort of stop making markets or stop posting or
Speaker 6: something then and you can't actually transact. Those are the
Speaker 6: things that the policymakers really care about.
Speaker 7: There's this balancing thing where we want treasure marks, we
Speaker 7: deep in liquid. Deep in liquid means it's inexpensive to transact,
Speaker 7: which means the dealers don't make much money per trade.
Speaker 7: So the old joke like we're making losses, but we'll
Speaker 7: make effort and volume kind of thing, and like hopefully
Speaker 7: not that.
Speaker 3: But the.
Speaker 7: Response that if you want low transaction costs, the way
Speaker 7: you get that, and so a functioning business is leverage.
Speaker 7: And this has been the case for you know, seventy
Speaker 7: five years since the Treasury fed a cord that this
Speaker 7: was always the core issue. And so when you leverage
Speaker 7: constrain banks, and even if the bank isn't leverage constrained,
Speaker 7: when the desk is leverage constrained. When leverage is a
Speaker 7: zero sum game within the institution, which is kind of
Speaker 7: what these leverage ratios do. Everyone's fighting over the same
Speaker 7: resource and that process introduces friction. And at the end
Speaker 7: of the day, I think these all events are mostly
Speaker 7: just time slippage. Like if you have to think about
Speaker 7: things for too long, the market can run away from you.
Speaker 7: So you know, in twenty twenty, if you had to
Speaker 7: spend two days figuring out who gets incremental balance sheet,
Speaker 7: a lot can happen in two days in March of
Speaker 7: twenty twenty. And these very human experiences are kind of
Speaker 7: a drive today.
Speaker 5: And we talked about this on the show that we
Speaker 5: did back in late April, about the April event, and
Speaker 5: that time slippage is exactly a big thing part of
Speaker 5: what happened when right before you fell asleep on April ninth, Right,
Speaker 5: it's because like, look, you can't call the New York
Speaker 5: dealer desk to get more dealer balent sheet at eleven
Speaker 5: thirty at night in New York time, and when you're
Speaker 5: trading in Hong Kong, right' It's it's hard to do that.
Speaker 5: So so you get these vol events that are create
Speaker 5: a liquid markets, but only at certain points in time, right,
Speaker 5: and then that always gets armed away.
Speaker 3: You know, people are are.
Speaker 5: You know at the end of the day where we're
Speaker 5: definitely not price takers, right, there's a lot of people
Speaker 5: who are you know, basically want the price of their
Speaker 5: of the asset to reflect the risk that they're taking.
Speaker 5: And so you're going to get these instantaneous shifts and
Speaker 5: expectations when you get a news event, when you get
Speaker 5: a headline from you know, Donald Trump, and you think
Speaker 5: that maybe the dollar is not going to be the
Speaker 5: reserve currency anymore. That's going to affect dollar assets regardless
Speaker 5: of where they are in the world.
Speaker 2: This has been an another episode of the Authots podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 4: And I'm Jill Wisenthal. You can follow me at the Stalwart.
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