1 00:00:02,520 --> 00:00:10,360 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. I'm Stephen Carroll, and 2 00:00:10,440 --> 00:00:12,800 Speaker 1: this is Here's Why, where we take one new story 3 00:00:12,840 --> 00:00:14,880 Speaker 1: and explain it in just a few minutes with our 4 00:00:14,920 --> 00:00:21,480 Speaker 1: experts here at Bloomberg. Bond market is very tricky. 5 00:00:21,520 --> 00:00:23,480 Speaker 2: I was watching it, but if you look at it now, 6 00:00:23,520 --> 00:00:28,200 Speaker 2: it's beautiful. The bond market right now is beautiful. 7 00:00:29,200 --> 00:00:31,800 Speaker 1: But yeah, I saw last night where people were getting 8 00:00:31,800 --> 00:00:35,880 Speaker 1: a little queasy. Donald Trump's trade tariffs have investors on edge. 9 00:00:36,200 --> 00:00:39,360 Speaker 1: The wild swings in prices of US government debt and 10 00:00:39,400 --> 00:00:42,440 Speaker 1: the volatility and borrowing costs that comes with it have 11 00:00:42,520 --> 00:00:45,280 Speaker 1: been the most glaring example of a loss of confidence 12 00:00:45,280 --> 00:00:49,280 Speaker 1: in what's long been considered a safe investment. Foreign investors 13 00:00:49,320 --> 00:00:52,959 Speaker 1: hold trillions of dollars in treasuries, so what happens if 14 00:00:52,960 --> 00:00:55,200 Speaker 1: they decide to put their money elsewhere. 15 00:00:55,560 --> 00:00:57,880 Speaker 2: Japan and China are two of the largest holders of 16 00:00:58,000 --> 00:01:00,680 Speaker 2: US treasuries, and if they decide that they don't want 17 00:01:00,720 --> 00:01:03,400 Speaker 2: to show up an auction, it's going to be very tricky. 18 00:01:03,520 --> 00:01:05,560 Speaker 1: I think what the treasury market is telling us is 19 00:01:05,560 --> 00:01:08,080 Speaker 1: that there is not a lot of balance sheet availability 20 00:01:08,120 --> 00:01:11,400 Speaker 1: to absorb all this treasury selling. Twenty twenty five feels 21 00:01:11,400 --> 00:01:13,800 Speaker 1: like a US driven situation and willingness on the part 22 00:01:13,880 --> 00:01:17,360 Speaker 1: of foreign investors to liquid date dollar assets. Treasuries are 23 00:01:17,360 --> 00:01:20,520 Speaker 1: part of that complex. Here's why America's debt is a 24 00:01:20,640 --> 00:01:25,120 Speaker 1: trade war victim. Our managing editor for FS and Rates, 25 00:01:25,240 --> 00:01:28,520 Speaker 1: Rachel Evans, joins me. Now for more. Rachel, First of all, 26 00:01:28,560 --> 00:01:31,840 Speaker 1: how important are foreign buyers for US government borrowing? 27 00:01:32,360 --> 00:01:35,560 Speaker 2: Very important. They comprise about a third of ownership for 28 00:01:35,840 --> 00:01:39,360 Speaker 2: the treasury market, so it's a significant piece of the pie. 29 00:01:39,640 --> 00:01:42,120 Speaker 2: And there's some analysis out there from Barklay's that that's 30 00:01:42,160 --> 00:01:45,560 Speaker 2: interesting that suggests that last year so foreign buyers were 31 00:01:45,640 --> 00:01:48,360 Speaker 2: really taking down like a large chunk of the debt 32 00:01:48,400 --> 00:01:50,960 Speaker 2: issuance that the US was putting out there. These are 33 00:01:51,000 --> 00:01:54,320 Speaker 2: all different types of owners. You've got pension funds, you've 34 00:01:54,320 --> 00:01:56,640 Speaker 2: got insurers, and you've also got central banks that are 35 00:01:56,640 --> 00:01:59,760 Speaker 2: sticking these into their reserves theoretically as kind of a 36 00:01:59,760 --> 00:02:01,680 Speaker 2: pillar of stability for themselves. 37 00:02:01,880 --> 00:02:05,440 Speaker 1: The term buyer strike might sound quite encendry in a 38 00:02:05,480 --> 00:02:08,360 Speaker 1: lot of ways, but what would a buyer's strike look 39 00:02:08,520 --> 00:02:10,359 Speaker 1: like in the US treasury markets? 40 00:02:10,720 --> 00:02:14,720 Speaker 2: Yeah, I think, simply put, and we haven't really seen 41 00:02:14,800 --> 00:02:17,680 Speaker 2: this necessarily, so it's kind of hard to exactly what 42 00:02:17,680 --> 00:02:19,720 Speaker 2: it would look like, but simply put, you would see 43 00:02:19,840 --> 00:02:23,480 Speaker 2: yields continually rising day after day, and particularly at the 44 00:02:23,560 --> 00:02:26,079 Speaker 2: long end. When we look at kind of the division 45 00:02:26,320 --> 00:02:29,240 Speaker 2: of the types of treasuries that are owned by foreign buyers, 46 00:02:29,440 --> 00:02:31,920 Speaker 2: it tends to skew towards longer dated debts, so thirty 47 00:02:32,000 --> 00:02:34,680 Speaker 2: year debts. So if you're starting to see yields really 48 00:02:34,720 --> 00:02:37,600 Speaker 2: kind of rocketing up at the long end in thirty 49 00:02:37,680 --> 00:02:40,440 Speaker 2: year debt, boring costs really sawing their day after day 50 00:02:40,440 --> 00:02:42,959 Speaker 2: after day, that would be an indication that you're starting 51 00:02:43,000 --> 00:02:45,240 Speaker 2: to see foreign buyers pulling back, and. 52 00:02:45,200 --> 00:02:48,560 Speaker 1: So far, no sign of that that we've seen in markets. 53 00:02:49,040 --> 00:02:52,000 Speaker 2: We've seen little dribs and drabs, but we haven't kind 54 00:02:52,040 --> 00:02:53,679 Speaker 2: of seen the sort of the prolonged action that you 55 00:02:53,720 --> 00:02:55,760 Speaker 2: would necessarily sort of view as being kind of a 56 00:02:55,800 --> 00:02:58,960 Speaker 2: bier strike. We had a slightly iffy auction earlier in 57 00:02:59,000 --> 00:03:01,639 Speaker 2: the week where we saw year debt sort of struggling 58 00:03:01,639 --> 00:03:03,679 Speaker 2: to find as much demand as it might sometimes, and 59 00:03:03,720 --> 00:03:06,520 Speaker 2: we've seen steeper yield cup so that the back end 60 00:03:06,720 --> 00:03:09,040 Speaker 2: of the curve selling off more those yields on thirty 61 00:03:09,080 --> 00:03:12,080 Speaker 2: year debt rising more so that does indicate sort of 62 00:03:12,440 --> 00:03:16,240 Speaker 2: the potential for demand overall is kind of diminishing a 63 00:03:16,280 --> 00:03:19,360 Speaker 2: little bit. And I was also taken by some analysis 64 00:03:19,360 --> 00:03:22,360 Speaker 2: that our colleague Cameron Christ did that suggested that since 65 00:03:22,360 --> 00:03:26,519 Speaker 2: Trump's inauguration, we've actually seen most selling outside of US hours. 66 00:03:26,520 --> 00:03:28,960 Speaker 2: So that tells you that in terms of who is 67 00:03:29,040 --> 00:03:32,359 Speaker 2: doing the selling, that it is often coming from overseas. 68 00:03:32,560 --> 00:03:35,800 Speaker 2: So there's been these kind of little hints of unease 69 00:03:36,000 --> 00:03:38,560 Speaker 2: I think amongst kind of foreign investors, but we've not 70 00:03:38,640 --> 00:03:41,200 Speaker 2: seen kind of the action that would suggest sort of 71 00:03:41,280 --> 00:03:43,840 Speaker 2: a or bona fide by a strike that's really going 72 00:03:43,880 --> 00:03:45,280 Speaker 2: to be there for the longer term. 73 00:03:45,280 --> 00:03:47,680 Speaker 1: So we're determined to sort of pullback that we would 74 00:03:47,720 --> 00:03:50,280 Speaker 1: term a strike in this context. I mean, if it 75 00:03:50,480 --> 00:03:53,960 Speaker 1: were to happen, theoretically, what would a last of foreign 76 00:03:54,000 --> 00:03:56,720 Speaker 1: interest in US debt mean for the US government? 77 00:03:56,920 --> 00:03:59,960 Speaker 2: I mean very simply higher yields, so higher borrowing cost 78 00:04:00,320 --> 00:04:02,320 Speaker 2: for the US government. They would need to pay more 79 00:04:02,360 --> 00:04:05,360 Speaker 2: to refinance their debt and to borrow new money. That 80 00:04:05,400 --> 00:04:08,080 Speaker 2: would also have a ripple through effect to things like 81 00:04:08,120 --> 00:04:11,200 Speaker 2: mortgage rates, which track ten year yields and are therefore 82 00:04:11,200 --> 00:04:12,880 Speaker 2: would also be going up so you'd be getting kind 83 00:04:12,880 --> 00:04:15,840 Speaker 2: of that ripple through effect from the US's borrowing costs 84 00:04:15,840 --> 00:04:18,640 Speaker 2: through to sort of the average Americans foreign costs and 85 00:04:18,680 --> 00:04:21,960 Speaker 2: their debt load. You'd also potentially see the US government 86 00:04:22,040 --> 00:04:24,599 Speaker 2: have to rethink how it sells debt. At the moment, 87 00:04:24,960 --> 00:04:27,320 Speaker 2: you know, you have kind of a balance between sort 88 00:04:27,320 --> 00:04:30,480 Speaker 2: of short dated bonds and longer dated securities that's kind 89 00:04:30,480 --> 00:04:34,000 Speaker 2: of set by Treasury to sort of tap into investor interest. Now, 90 00:04:34,160 --> 00:04:36,120 Speaker 2: Scott Bessen has said that he would like to move 91 00:04:36,160 --> 00:04:38,680 Speaker 2: away from having so much debt at the short end 92 00:04:38,720 --> 00:04:40,599 Speaker 2: of the curve, so many bills. He wants more longer 93 00:04:40,680 --> 00:04:43,440 Speaker 2: term debt. However, if your cost of longer term debt 94 00:04:43,480 --> 00:04:46,720 Speaker 2: is skyrocketing upwards, that becomes very very difficult, and the 95 00:04:47,640 --> 00:04:49,640 Speaker 2: need to really issue more short data debt that you 96 00:04:49,680 --> 00:04:51,760 Speaker 2: can pay less on becomes higher. So I think you 97 00:04:51,839 --> 00:04:54,840 Speaker 2: just sort of have to see that the government recalibrating 98 00:04:55,040 --> 00:04:57,000 Speaker 2: how it sells debt in order to make sure that 99 00:04:57,040 --> 00:04:59,120 Speaker 2: it's tapping the investors that do stick around. 100 00:05:00,080 --> 00:05:02,359 Speaker 1: Would the Federal Reserve get involved in this, Whether there 101 00:05:02,400 --> 00:05:05,200 Speaker 1: be a moment at which something would get so dramatic 102 00:05:05,279 --> 00:05:07,080 Speaker 1: that the Central Bank would have to act. 103 00:05:06,960 --> 00:05:09,640 Speaker 2: So the central Bank has it's obviously economic mandate where 104 00:05:09,640 --> 00:05:12,680 Speaker 2: it's thinking about inflation and growth and jobs, so this 105 00:05:12,720 --> 00:05:15,800 Speaker 2: doesn't necessarily impinge on that. They're also looking at kind 106 00:05:15,839 --> 00:05:18,520 Speaker 2: of market functioning. So I think where the FED might 107 00:05:18,560 --> 00:05:21,200 Speaker 2: get involved is where if you see some dislocations and 108 00:05:21,240 --> 00:05:24,160 Speaker 2: some breakages and how the market functions. 109 00:05:24,200 --> 00:05:26,640 Speaker 1: Being extremely abnormal essentially exactly. 110 00:05:26,680 --> 00:05:28,280 Speaker 2: I mean, this is sort of what we saw back 111 00:05:28,279 --> 00:05:31,040 Speaker 2: in like March twenty twenty, when we saw kind of 112 00:05:31,320 --> 00:05:34,359 Speaker 2: a huge liquidation of pretty much every assets but a 113 00:05:34,440 --> 00:05:36,680 Speaker 2: dash for cash, and that really kind of sort of 114 00:05:36,720 --> 00:05:39,200 Speaker 2: broke some of the plumbing in the markets. We saw 115 00:05:39,200 --> 00:05:41,520 Speaker 2: a lot of hedge fund trades and winding very very rapidly, 116 00:05:41,839 --> 00:05:44,240 Speaker 2: and the FED did step in then with various kind 117 00:05:44,279 --> 00:05:47,120 Speaker 2: of facilities to try and kind of ease some of 118 00:05:47,120 --> 00:05:49,880 Speaker 2: the liquidity constraints that were really sort of upsetting the 119 00:05:49,920 --> 00:05:52,200 Speaker 2: market at the time. So there has been some sort 120 00:05:52,200 --> 00:05:54,880 Speaker 2: of conversation in markets about, you know, whether the FED 121 00:05:54,960 --> 00:05:58,559 Speaker 2: could intervene or how they'd intervene. So speculate that maybe 122 00:05:58,560 --> 00:06:01,200 Speaker 2: they could step in and do sort of emergency qe, 123 00:06:01,279 --> 00:06:04,640 Speaker 2: you know, stepping into buy bonds. Others say, no, that's 124 00:06:04,680 --> 00:06:07,920 Speaker 2: not likely, but maybe we could see sort of exemptions 125 00:06:07,960 --> 00:06:10,880 Speaker 2: from the so called supplementary leverage ratio. So the SLR 126 00:06:11,000 --> 00:06:14,000 Speaker 2: kind of restricts how much dealers can have on their 127 00:06:14,000 --> 00:06:16,480 Speaker 2: balance sheet in terms of treasuries. If you suspended that, 128 00:06:16,600 --> 00:06:18,960 Speaker 2: people might have a little bit more room to kind 129 00:06:18,960 --> 00:06:21,200 Speaker 2: of manage a rapid sell off. So there's kind of 130 00:06:21,240 --> 00:06:23,680 Speaker 2: conversations about that, but we haven't got to a point 131 00:06:23,760 --> 00:06:26,920 Speaker 2: yet where those dislocations are particularly severe. In fact, you're 132 00:06:26,920 --> 00:06:29,279 Speaker 2: looking kind of at funding markets. While we are seeing 133 00:06:29,320 --> 00:06:32,760 Speaker 2: sort of an increasing cost, it's still relatively contained and 134 00:06:32,800 --> 00:06:36,000 Speaker 2: I think Beth Hammock of the Cleveland Feds or described 135 00:06:36,040 --> 00:06:38,839 Speaker 2: them as as strained but sort of working. 136 00:06:39,160 --> 00:06:42,840 Speaker 1: Okay, so question marks over that safe haven status rather 137 00:06:42,920 --> 00:06:45,520 Speaker 1: than necessarily a serious attack on us. 138 00:06:45,680 --> 00:06:48,040 Speaker 2: Yeah, I mean, I think what we will see. I mean, 139 00:06:48,080 --> 00:06:50,880 Speaker 2: we are seeing kind of like rallies in European bonds 140 00:06:50,880 --> 00:06:53,880 Speaker 2: this week, and they're providing kind of an alternative to 141 00:06:54,000 --> 00:06:56,400 Speaker 2: those who are seeking havens. I think, you know, there's 142 00:06:56,400 --> 00:06:58,320 Speaker 2: a lot of bigger questions, you know, just kind of 143 00:06:58,320 --> 00:07:01,480 Speaker 2: given this very volatile period we've had since kind of 144 00:07:01,480 --> 00:07:04,600 Speaker 2: the tariff announcement, to what degree, you know, investors overseas 145 00:07:04,640 --> 00:07:07,200 Speaker 2: continue to view treasuries as ballast or is it a 146 00:07:07,279 --> 00:07:09,560 Speaker 2: kind of stable asset that they want to hold as 147 00:07:09,680 --> 00:07:13,160 Speaker 2: a haven. Obviously, the US is still deeply embedded in 148 00:07:13,200 --> 00:07:15,640 Speaker 2: the financial system. This is still a very kind of 149 00:07:15,760 --> 00:07:19,880 Speaker 2: dollar dominated financial system, So that's not going to change overnight, 150 00:07:19,920 --> 00:07:21,680 Speaker 2: but you know, you do sort of see kind of 151 00:07:21,720 --> 00:07:25,120 Speaker 2: subtle shifts happening over years. And I mean a lot 152 00:07:25,120 --> 00:07:27,480 Speaker 2: of people have talked about whether China could, for example, 153 00:07:27,520 --> 00:07:30,240 Speaker 2: get out of its treasury holdings, and there's no indication 154 00:07:30,320 --> 00:07:32,960 Speaker 2: of that happening immediately, but they have been reducing those 155 00:07:33,040 --> 00:07:34,880 Speaker 2: gradually over the last decade. 156 00:07:34,560 --> 00:07:37,600 Speaker 1: Because as we see trade engines with China ramping up, 157 00:07:38,160 --> 00:07:40,400 Speaker 1: is this actually something that could be was a conscious 158 00:07:40,440 --> 00:07:43,120 Speaker 1: decision that might come from Beijing, which would go beyond 159 00:07:43,160 --> 00:07:47,200 Speaker 1: just investors looking elsewhere for more stable investments, but perhaps 160 00:07:47,320 --> 00:07:49,000 Speaker 1: actually a tool in the trade war. 161 00:07:49,320 --> 00:07:50,960 Speaker 2: Yeah, I mean, it's it's a good question to ask, 162 00:07:50,960 --> 00:07:52,480 Speaker 2: and I think you know, a lot of people are wandering, 163 00:07:52,640 --> 00:07:56,600 Speaker 2: given we're in pretty unprecedented times, whether unprecedented trade war 164 00:07:56,640 --> 00:08:00,280 Speaker 2: tools could be deployed. I mean, the Chinese government tends 165 00:08:00,320 --> 00:08:02,440 Speaker 2: to take a more long term picture about these things. 166 00:08:02,760 --> 00:08:04,640 Speaker 2: I mean, as I mentioned, they've been kind of winding 167 00:08:04,680 --> 00:08:06,960 Speaker 2: down some of their treasuries holdings over the last decade. 168 00:08:06,960 --> 00:08:08,640 Speaker 2: You know, they were at one point holding I think 169 00:08:08,680 --> 00:08:11,280 Speaker 2: one point three trillion dollars of US debt that's now 170 00:08:11,320 --> 00:08:13,760 Speaker 2: down to about seven hundred billion, And in fact, Japan 171 00:08:13,880 --> 00:08:18,040 Speaker 2: is now the largest holder overseas of treasuries. So China 172 00:08:18,080 --> 00:08:20,800 Speaker 2: doesn't necessarily have to move kind of immediately, and like 173 00:08:20,920 --> 00:08:23,520 Speaker 2: particularly with great speed, they have a very long term 174 00:08:23,640 --> 00:08:26,400 Speaker 2: view on how to kind of change their policy. But 175 00:08:26,480 --> 00:08:30,200 Speaker 2: it's certainly a kind of underlying concern that they could 176 00:08:30,240 --> 00:08:33,240 Speaker 2: start dumping treasuries at the moment, though, it seems more 177 00:08:33,320 --> 00:08:36,400 Speaker 2: likely that they're going to manage the currency exchange rate 178 00:08:36,720 --> 00:08:38,920 Speaker 2: as kind of their tool as a bit of a 179 00:08:38,960 --> 00:08:41,319 Speaker 2: release volve for some of the pressures that have been 180 00:08:41,320 --> 00:08:43,040 Speaker 2: building up in relation to tariffs. 181 00:08:43,200 --> 00:08:45,840 Speaker 1: Okay, Rachel Evans are managing editor for FX and Rates. 182 00:08:45,880 --> 00:08:48,760 Speaker 1: Thank you for more explanations like this from our team 183 00:08:48,760 --> 00:08:51,280 Speaker 1: of three thousand journalists and analysts around the world, go 184 00:08:51,320 --> 00:08:55,840 Speaker 1: to Bloomberg dot com slash explainers. I'm Stephen Carroll. This 185 00:08:55,880 --> 00:08:57,920 Speaker 1: is here's why. I'll be back next week with more. 186 00:08:58,120 --> 00:09:02,880 Speaker 1: Thanks for listening.