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

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Speaker 2: Hello and welcome to another episode of the Out Thoughts podcast.

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Speaker 2: I'm Tracy Alloway and I'm Joe Wisenthal. Joe, one of

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Speaker 2: the struggles we're having right now is that so much

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Speaker 2: is happening, so much has been going on, that it's

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Speaker 2: hard enough to keep up with the immediate news, but

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Speaker 2: it's especially hard to stop and kind of ponder and

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Speaker 2: analyze what just happened. You sort of move on to

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Speaker 2: the next thing immediately, right.

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Speaker 3: Well, I've always said hindsight is not twenty twenty because

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Speaker 3: we all disagree about things that have happened in the past.

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Speaker 4: We know that all the time, So I've always hated

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Speaker 4: that cliche.

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Speaker 3: But at least from the perspective of podcast co hosts,

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Speaker 3: talking about the past removes the risk to some extent

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Speaker 3: that the episode we're doing is completely.

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Speaker 4: Normal immediately going to be out of it by the

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Speaker 4: time it's released.

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Speaker 2: Yeah, this is true. Okay, So hopefully this episode will

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Speaker 2: still be relevant. I think it will be. We're going

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Speaker 2: to talk about what happened in the bond market basically

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Speaker 2: in April of twenty twenty five. I think that will

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Speaker 2: still be relevant. This was one of the biggest, most

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Speaker 2: dramatic things that happened in a market that, really, as

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Speaker 2: I like to say, is supposed to be pretty boring, right, Like,

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Speaker 2: people buy you as bonds because you want that little

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Speaker 2: bit of income. You want to know that you're getting

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Speaker 2: your money back, You want some certainty. People don't buy

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Speaker 2: it because it's moving around a lot on a day

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Speaker 2: to day basis. And yeah, that's exactly what we saw

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Speaker 2: happen in April post Trump's Liberation Day on April second,

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Speaker 2: So we should talk about.

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Speaker 3: It totally, in particular the night of April ninth. Now,

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Speaker 3: the tenure yield actually peaked on April eleventh. We're recording

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Speaker 3: this April twenty fourth. The recent peak was April eleventh,

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Speaker 3: But April ninth I will never forget as the night

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Speaker 3: that I got zero sleep because I was just refreshing

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Speaker 3: my Bloomberg gap on the couch because I just was

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Speaker 3: watching this yield spike and everyone's like, it's China dumping. No,

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Speaker 3: it's Japan dumping. No, it's margin calls, and everyone's just

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Speaker 3: looking for cash. We need answers for what happened the

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Speaker 3: night of April eighth.

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Speaker 2: This is already revisionist history, because you're on the record

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Speaker 2: saying that you did, in fact fall asleep on your couch,

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Speaker 2: and now you're saying you got no sleep.

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Speaker 3: So it was late, and the peak was actually, I

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Speaker 3: don't know, somewhere in there whatever.

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Speaker 2: Points still stands. Stuff was happening in the treasury market,

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Speaker 2: and there was a lot of discussion when it was

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Speaker 2: happening about what was going on. A lot of people

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Speaker 2: reaching for the old bond market boogeyman in the form

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Speaker 2: of the basis trade, and then a lot of people

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Speaker 2: talking about other things like maybe real money sellers who

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Speaker 2: just don't want to be as exposed to US debt

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Speaker 2: anymore because of all the uncertainty from Trump and his

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Speaker 2: tariff regime, et cetera. So we should talk about it.

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Speaker 3: By the way, twelve ten a m. On the morning

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Speaker 3: of April ninth was that intermediate peak, So I think

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Speaker 3: I was still awake by then.

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Speaker 2: Keep going, Okay, now that we've settled the most important

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Speaker 2: part of what happened on that particular day, we do,

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Speaker 2: in fact have the perfect guest. We're going to be

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Speaker 2: speaking with someone who we wanted to get on the

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Speaker 2: podcast for a really long time. And shame on us.

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Speaker 2: We didn't do it because he's here at Bloomberg and

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Speaker 2: he's sort of widely available, so we just kind of

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Speaker 2: kept putting it off. But now is the perfect time

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Speaker 2: to do this. So we're going to be speaking with

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Speaker 2: Ira Jersey. He is, of course, chief Global Interest rate

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Speaker 2: strategist for Bloomberg Intelligence, and I'm so glad we can

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Speaker 2: finally have him on to talk about everything that's been happening. Iira,

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Speaker 2: thank you so much for coming on on lots.

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Speaker 5: Thanks very much for having me on. I have to

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Speaker 5: admit I am one episode behind, So don't talk about

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Speaker 5: your last episode with me, because I'll listen to that

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Speaker 5: on my way home today.

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Speaker 2: You're saving it for later, Okay, we won't ruin the

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Speaker 2: plot of the latest episode. Okay, I guess just a

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Speaker 2: color question to start off with, But what have the

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Speaker 2: last few weeks been like for you? You know, you're

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Speaker 2: the chief rate strategist over at BI. There's been no

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Speaker 2: shortage of stuff to write and analyze at the moment.

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Speaker 2: How busy has it been and how dramatic is everything

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Speaker 2: against your previous experience in bonds?

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Speaker 5: Yeah, so we've been talking about this, like, is this

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Speaker 5: the busiest couple of weeks that we've ever had, and

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Speaker 5: I would go back to the last time that was

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Speaker 5: something similar was the September October period of two thousand

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Speaker 5: and eight. For me, back in those days, I was

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Speaker 5: covering Fanny May and Freddie Mack and obviously they went

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Speaker 5: into conservatorship during that period. Then you had the whole

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Speaker 5: TARP failure where Congress didn't pass the rescue plan and

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Speaker 5: then finally they did, so there were you know, many

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Speaker 5: questions about the financial world back then. I think this

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Speaker 5: period is a little bit different in that we're talking

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Speaker 5: about and you've talked about this on the show already

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Speaker 5: over the last few weeks. This is a bit different

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Speaker 5: because you're talking about real economy issues as opposed to

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Speaker 5: financial economy issues. And because of that, people are wondering, like,

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Speaker 5: is there going to be a new world order? What

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Speaker 5: does it mean when you get you know, thirty basis

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Speaker 5: point spikes in the ten year yield on you know,

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Speaker 5: just one tweet. Does that mean that the dollar is

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Speaker 5: no longer going to be the reserve currency? These are

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Speaker 5: the questions that we continually get and it's difficult to

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Speaker 5: say at this point because we don't know what the

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Speaker 5: endgame is. But yeah, like you said, Tracy, there's absolutely

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Speaker 5: no lack of things to talk about.

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Speaker 3: Why would you say this is more uncertain or busy

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Speaker 3: than COVID Because then we also saw this big liquidation

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Speaker 3: selling in treasuries, We saw an extraordinary effort by the

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Speaker 3: FED to come out and stabilize the bond market. What

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Speaker 3: is it that puts this more in the category of

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Speaker 3: the Great Financial Crisis rather than March twenty twenty.

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Speaker 5: Well, I think in March twenty twenty, we all knew

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Speaker 5: that there was an issue, and the FED and other

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Speaker 5: fiscal agents acted very swiftly because everyone kind of knew

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Speaker 5: what the endgame was. We knew that we were going

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Speaker 5: to be shut down. We knew that we had to

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Speaker 5: figure out some way to live in a world where

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Speaker 5: everyone was at home. So I think that that the

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Speaker 5: fact that the endgame was kind of understood at the

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Speaker 5: time and policymakers acted very quickly because they knew what

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Speaker 5: the path would be if they didn't do anything. In

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Speaker 5: two thousand and eight, we knew that like, look, if

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Speaker 5: TARP didn't pass, what might have happened to the banking

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Speaker 5: sector At the time, you just had Leman go under.

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Speaker 5: You just had Fanny and Freddie go under. So and yes,

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Speaker 5: there was some policy response, but it wasn't enough, Like

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Speaker 5: the FED alone wasn't enough to get us out of

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Speaker 5: that particular situation. And I think here the issue that

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Speaker 5: we have today is there is and we always use

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Speaker 5: the term uncertainty, but I think we have to because

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Speaker 5: we don't know what the endgame ultimately is, right. We

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Speaker 5: don't know is is this the administration's way of getting

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Speaker 5: people to the table for things like defense burden sharing.

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Speaker 5: Is this the way that for them to get to

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Speaker 5: the table to isolate China? Is this the administration's way

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Speaker 5: of basically saying that, Hey, we don't know how to

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Speaker 5: cut the deficit, so let's focus on international because we

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Speaker 5: can do that. And that's in the president's purview as

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Speaker 5: opposed to something that Congress has to do. So I

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Speaker 5: think that there is a lot of right now uncertainty.

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Speaker 5: And I think the moves in the treasury market kind

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Speaker 5: of show the fragility of liquidity in the treasury market.

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Speaker 5: And there's a lot of reasons for that, and we

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Speaker 5: can get wonky. And I've talked about this for over

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Speaker 5: a dozen years since the Basil capital rule regulations went

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Speaker 5: into effect. But there are a lot of reasons to

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Speaker 5: think that we're going to continue to see these bouts

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Speaker 5: of volatility in the treasury market because of structural changes,

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Speaker 5: and when those structural changes come out like they did

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Speaker 5: the last few weeks, you do see these extreme volatility

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Speaker 5: events like we did on the seventh of April, Like

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Speaker 5: we did on the ninth of April.

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Speaker 2: Well, okay, so since Joe brought up twenty twenty and

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Speaker 2: the response from the Fed back then, why don't we

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Speaker 2: go ahead and let's just talk about the basis change

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Speaker 2: because this was the initial thing that everyone kind of

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Speaker 2: reached for when we first started seeing these very extreme

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Speaker 2: moves in the bond market, and it's sort of the

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Speaker 2: bond market equivalent nowadays of you know how everyone says, oh, somewhere,

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Speaker 2: a macro pod is blowing up, right, or a pod shop.

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Speaker 2: What did I say, macropod multi strategy is blowing up? Yeah,

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Speaker 2: pod is blowing up somewhere. And I feel like people

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Speaker 2: start talking about the basis trade as soon as there's

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Speaker 2: some fall event in US treasuries nowadays. But what are

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Speaker 2: we discovering about the basis trade and its role in

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Speaker 2: the sell off a few weeks ago in the aftermath

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Speaker 2: and with some new numbers and information that's been coming out.

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Speaker 5: Yeah, So firstly that the basis trade, if it was

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Speaker 5: the culprit, we didn't see it in the data almost

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Speaker 5: immediately because we would have seen things like a reduction

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Speaker 5: and open interest of treasury futures. It went down a

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Speaker 5: little right, open interest fell slightly, but it wasn't the

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Speaker 5: type of magnitude that was outside the normal daily volatility,

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Speaker 5: So it didn't seem to be that number two. You

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Speaker 5: would have seen the futures move significantly more in magnitude

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Speaker 5: against cash if it was the treasury futures basis. I

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Speaker 5: think that one of the reasons why many people focused

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Speaker 5: on this early on was it was something that the

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Speaker 5: Federal Reserve and some other policy makers were worried about

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Speaker 5: because they are very highly levered trades. But they have

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Speaker 5: to be. But why were these trades created? So these

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Speaker 5: trades are created because asset managers, in order to comply

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Speaker 5: with some of their own liquidity rules, end up having

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Speaker 5: a lot of cash on their balance sheet and to

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Speaker 5: make up for their duration gap to be closer to

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Speaker 5: the Bloomberg Aggregate Index or whatever their benchmark is, they

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Speaker 5: go out and buy futures on top of that cash

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Speaker 5: instead of buying an actual treasury security. What that means is,

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Speaker 5: because it's a future, there has to be a seller

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Speaker 5: for every buyer of a futures contract. So that leaves

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Speaker 5: others which has to be then levered investors or dealers

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Speaker 5: short treasury futures. Now, if you're short of treasury future

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Speaker 5: and you don't want to be short treasury future, you

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Speaker 5: don't want to be short treasuries, what do you do?

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Speaker 5: You have to hedge that somehow, And there's only realistically

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Speaker 5: two ways that people hedge. One is you can buy

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Speaker 5: a treasury or you can receive in an interest rate swap,

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Speaker 5: and that's what we call an invoice spread. So it's

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Speaker 5: futures versus swaps is called an invoice spread. We can

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Speaker 5: go back to the history of the nineteen eighties about

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Speaker 5: how that got its name, but I think that's unimportant

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Speaker 5: for this discussion. So what you did see during that

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Speaker 5: period of time was not so much the treasury futures

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Speaker 5: basis trade unwinding, but you saw the swap spread portion

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Speaker 5: of that trade unwinding. And that's one reason why everyone

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Speaker 5: talked about the treasury futures basis, but it really if

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Speaker 5: you looked at the price action, it was really the

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Speaker 5: swap market that was moving around ten basis points at

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Speaker 5: a clip, just on every single headline, every single tweet.

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Speaker 5: And I think that that's more reflective of the leverage

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Speaker 5: that was being unwound, was more in the over the

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Speaker 5: counter swap market as opposed to in the futures. Well,

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Speaker 5: I was about say, future's pits is not really pits anymore, but.

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Speaker 4: We get it, we get it.

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Speaker 2: So just on the swap spreads point, this was basically

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Speaker 2: the bank deregulation trade slash duration trade that a lot

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Speaker 2: of people put on posts Trump's win in November.

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Speaker 5: That's my understanding, correct, Yeah, and we did too. So

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Speaker 5: after President Trump won, the expectation was that the enhanced

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Speaker 5: supplementary leverage ratio would be removed and that would allow

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Speaker 5: banks to own more treasuries. So therefore, if they could

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Speaker 5: own more treasuries instead of receiving and interest rate swaps

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Speaker 5: to get a little bit more duration to hedge other things,

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Speaker 5: they could buy treasuries out right instead. So most people,

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Speaker 5: both strategists as well as market participants were putting on

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Speaker 5: swapspread wideners. So swapspreads have been negative even when we

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Speaker 5: still have libor. So now we use something called SO

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Speaker 5: for the secured overnight financing rate, which is basically the

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Speaker 5: repurchase agreement market that's used as the underlying for these

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Speaker 5: interest rate swaps. It used to be libor. Even when

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Speaker 5: it was libor, swap spreads in the long end especially

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Speaker 5: were very negative, and the reason for that was the

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Speaker 5: new regulations that went into effect again, both dot frank

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Speaker 5: and some basle regulations, plus a very underappreciated part of

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Speaker 5: the market, which is insurance company regulations, which are often

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Speaker 5: regulated by states, not by the federal government. So when

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Speaker 5: states said, oh, you have to have a more diversified

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Speaker 5: portfolio of credits within your general account for life insurance

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Speaker 5: companies or p and C property and casualty insurers we

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Speaker 5: call them p and C insurres, they go out and say, okay,

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Speaker 5: we want to buy thirty year single a corporate debt. Well,

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Speaker 5: if you want to be diversified and be in one

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Speaker 5: hundred different names, there's not one hundred names that your

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Speaker 5: credit analysts are going to let you be in and

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Speaker 5: allow you to buy that issue thirty year debt. So

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Speaker 5: what happens is they end up having to buy ten

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Speaker 5: year debt or even five year debt in some cases,

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Speaker 5: and that leaves these insurance companies with this massive duration

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Speaker 5: gap because they have long term liabilities. Right life insurance

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Speaker 5: contracts are very long term liabilities. They need to hedge

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Speaker 5: that with having their own long term assets on their

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Speaker 5: balance sheet, and that ten year corporate doesn't meet that need.

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Speaker 5: So how then does an insurance company end up making

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Speaker 5: up that duration gap? And the answer is they receive

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Speaker 5: an interest rate swaps because it's capital efficient. When you

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Speaker 5: start an interest rate swap, your cost is zero as

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Speaker 5: opposed to going out and buying a treasury or even

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Speaker 5: buying a treasury strip, so as zero coupon long term

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Speaker 5: treasury we call them treasury strips. They don't want to

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Speaker 5: do that because it's not balance sheet efficient. So that's

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Speaker 5: kept swap spreads negative. But what kept swapsharp is even

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Speaker 5: more negative, was the fact that banks couldn't own enough

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Speaker 5: treasuries in order to kind of hedge their own short

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Speaker 5: exposure to interest rate swap. So it's underappreciated how much

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Speaker 5: bank and bank balance sheets really matter to the pricing

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Speaker 5: of a lot of these trades and security.

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Speaker 4: First of all, I just think this is great, and.

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Speaker 3: This is really clear as clear as these kind of

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Speaker 3: conversations can get.

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Speaker 4: This is really helpful.

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Speaker 5: You know.

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Speaker 4: One of the things when people.

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Speaker 3: Hear about these sort of like various trades that are

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Speaker 3: basis trade that are going on, they're like, oh, they're

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Speaker 3: leveraged sixty to one, and like, oh, they're just gambling.

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Speaker 3: And sometimes you hear about all the FED having to like,

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Speaker 3: you know, sort of stabilize the system. They're all these

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Speaker 3: regular speculators putting on insane leverage for picking up pennies

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Speaker 3: and now they're being backstopped. And what I like about

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Speaker 3: your explanation or your characterization is they're economic rationales for

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Speaker 3: this trade because it often gets flattened into speculation and

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Speaker 3: a casino. But various entities, whether it's the banks meeting

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Speaker 3: their regulatory obligations, the insurance companies are meeting their regulatory obligations,

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Speaker 3: there are real rationales for the existence of these markets

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Speaker 3: rooted in economics.

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Speaker 2: Well, there's also a utility value, which is why arguably,

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Speaker 2: even though regulators are very aware of this you have

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Speaker 2: been worried about it, they haven't exactly done anything to

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Speaker 2: really like clamp down on it.

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Speaker 5: No, totally.

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Speaker 3: Like these markets serve economic purpose in a way that

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Speaker 3: sometimes I think doesn't come through. Let's go to the

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Speaker 3: night that I fell asleep on my couch.

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Speaker 2: You know, there's the night that shall forever be known

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Speaker 2: as Joe falling asleep on his couch while looking.

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Speaker 4: At Bloomberg charts that night.

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Speaker 3: So when the market's selling off, when treasuries are selling

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Speaker 3: off intensely, you know, I think there's like various interpretations

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Speaker 3: or people have different ideas. So that's like, oh, it's

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Speaker 3: China getting revenge, or it's a steepener trade. There's going

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Speaker 3: to be more inflation in the future, and so the

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Speaker 3: path of interest rates is going to be higher than

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Speaker 3: we otherwise theod thought. And I'm a sort of strict

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Speaker 3: constructionist reader of the yield curve, so I always like that.

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Speaker 3: And then there's liquidation. Someone has to meet a margin

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Speaker 3: call somewhere, pay cash somewhere, and so they have to

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Speaker 3: sell their low liquidity treasuries to get a cash or whatever.

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Speaker 4: What was I watching on the couch that night.

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Speaker 5: Yeah, so I think there were a few things that

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Speaker 5: you were watching. One is you were looking at a

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Speaker 5: market that was very liquid. Keep in mind when you

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Speaker 5: fell asleep on your couch at midnight East Coast time. Yeah,

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Speaker 5: London was not yet open. Okay, so you were talking

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Speaker 5: about Tokyo and Hong Kong and Singapore were basically the

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Speaker 5: liquidity providers at the time in terms of dealer and

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Speaker 5: dealer desks, and they're going to be constrained. So even

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Speaker 5: if you only had a little tiny bit of selling

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Speaker 5: right in terms of volume, if it was all one

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Speaker 5: way at the same time, you probably had dealers that

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Speaker 5: weren't willing to take on that exposure at that moment.

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Speaker 5: And you'll notice on that day, like if you just

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Speaker 5: do an inter date chart and do a GP on

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Speaker 5: the tenure yield on the Bloomberg terminal.

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Speaker 4: I've done it.

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Speaker 5: Yeah, you can see as soon as London opened, the

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Speaker 5: market actually came back, and the market actually rallied a bit,

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Speaker 5: and there wasn't really any headlines at two am New

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Speaker 5: York time. But the fact is you had more liquidity.

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Speaker 5: So now you had some bottom fissures. Some people said, oh,

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Speaker 5: I can now buy a ten year bond two dollars

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Speaker 5: cheaper than I could last night, or when the market

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Speaker 5: closed yesterday, so you know, let's just cover a short

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Speaker 5: or just maybe take a little bit of a punt

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Speaker 5: and a long position. And then the market was still

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Speaker 5: very volatile after that. And I think part of the

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Speaker 5: reason it continued to be volatile was, besides the fact

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Speaker 5: that we had all of the tweets on again off

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Speaker 5: again tariff talk, is that people don't like to get

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Speaker 5: in front of volatility. And the fact is when volatility

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Speaker 5: is high, dealers tend to not only widen their bid offers,

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Speaker 5: but they also pull back. And another I think underappreciated

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Speaker 5: aspect of this too, and again I go back to

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Speaker 5: financial sector balance sheets. If you look at dealers, dealers

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Speaker 5: were as long treasuries going into this as they've ever been,

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Speaker 5: so they own more treasuries than ever in history. Now

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Speaker 5: part of that is because the treasuring market is bigger,

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Speaker 5: but a lot of these treasuries that they added they

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Speaker 5: added within the last six months. So this wasn't like

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Speaker 5: it wasn't like it turned on the dime, and it

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Speaker 5: wasn't very systemic. But the fact that there was a

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Speaker 5: lot of cash already on dealers balance sheets and still

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Speaker 5: is dealers are still very long cash bonds right now,

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Speaker 5: and again there are short futures on the other side

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Speaker 5: of that, It probably meant that they weren't able to

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Speaker 5: take on a lot more supply without getting approvals. Right,

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Speaker 5: you have to go to your risk manager and say, hey,

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Speaker 5: we'd like to make markets here, but we're fall like

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Speaker 5: can we make markets? So there are a certain amount

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Speaker 5: of regulatory arbitrage that you can't do today that you

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Speaker 5: were able to do prior to the Basle three capital

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Speaker 5: rules going into effect. It's what I call balance gad elasticity. Basically,

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Speaker 5: dealers don't have the same type of balance sheet elasticity

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Speaker 5: as they used to have prior to Basil two and

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Speaker 5: a half in Basil three rules.

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Speaker 2: Right, So I hate this term. But people are asking

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Speaker 2: questions about what real money investors did in all of this,

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Speaker 2: and you know, money is money in my book. But

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Speaker 2: the idea of you know, I guess people that are

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Speaker 2: holding these things on a longer term basis these real

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Speaker 2: money investors. And this to me is actually like, this

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Speaker 2: is the scenario that could be more worrying than a

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Speaker 2: basis trade blow up, because like, okay, basis trades blow up,

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Speaker 2: the FED can basically come in and do something pretty

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Speaker 2: easily nowadays, and we're talking about a single levered trade

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Speaker 2: that's based on arbitraging, like a very technical relationship that's

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Speaker 2: blowing out, and so all of those positions are getting

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Speaker 2: changed very rapidly. But if we're talking about the collapse

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Speaker 2: of a real money investment in US debt because of

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Speaker 2: all this policy uncertainty and people wanting to I guess

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Speaker 2: dedollarize their balance sheets, that seems much more existential to me.

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Speaker 2: So what have you observed in the case of real

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Speaker 2: money investors?

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Speaker 5: So it depends on how you define real money. So

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Speaker 5: I agree with you Tracy there. You know, you're talking

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Speaker 5: about central banks, sovereign wealth funds, action managers, you know,

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Speaker 5: pension funds and the like, right, so, and they all

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Speaker 5: have different economic reasons why they participate in the bond

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Speaker 5: market in general and the treasury market in particular. So

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Speaker 5: we can go through each of those very briefly. So first,

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Speaker 5: you know, it's not obvious to me that central banks

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Speaker 5: were selling. So this idea that you know, Joe brought

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Speaker 5: up some one of the things that people were saying,

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Speaker 5: that oh it's China selling.

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Speaker 2: Kind of dumping treasury.

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Speaker 5: Yeah, and the fact is is that And I'm not

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Speaker 5: going to talk specifically about China, but central banks in

400
00:19:55,760 --> 00:20:00,280
Speaker 5: general when they own treasuries for their reserve account. So

401
00:20:00,320 --> 00:20:02,639
Speaker 5: whether they own treasuries, or they own German boons, or

402
00:20:02,640 --> 00:20:05,640
Speaker 5: they own something in Sterling or Japanese government bonds, they

403
00:20:05,640 --> 00:20:08,240
Speaker 5: own short term securities. They don't go out and buy

404
00:20:08,280 --> 00:20:09,960
Speaker 5: tens and thirties because they don't want to take a

405
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Speaker 5: lot of price risk. They want to be able to

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Speaker 5: have their portfolio run off. And you've seen China do

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Speaker 5: this actually over the last ten years or so, reduce

408
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Speaker 5: their portfolio in order to defend their currency. And they

409
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Speaker 5: want to be able to do that very quickly without

410
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Speaker 5: moving the market a lot. And in order to do that,

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Speaker 5: you own short term debt. Now who does own the

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Speaker 5: long term debt? And we put out a chart about

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Speaker 5: this actually a couple of weeks ago, actually on the

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Speaker 5: eighth and most foreigners who own the long end are

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Speaker 5: private investors. So these are portfolio investors. These are pension funds,

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Speaker 5: insurance companies, and they own those because they can buy

417
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Speaker 5: treasuries and even after currency hedging, pick up yield compared

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Speaker 5: to their own home currency. So one of the perfect

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Speaker 5: examples of that is Taiwan. So taiwan Es insurance companies

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Speaker 5: will buy a lot of US debt, both corporates and treasuries,

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Speaker 5: and if they hedge it back, they still pick up

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Speaker 5: yield compared to the Taiwanese dollar debt. So they like

423
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Speaker 5: doing that trade, right, Why wouldn't you You pick up

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Speaker 5: yield and you get US treasury risk instead of time

425
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Speaker 5: on treasury risk. If you go to a central bank,

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Speaker 5: they won't be doing that, right. They'll go out and

427
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Speaker 5: they'll participate in three year auctions to your auctions. They'll

428
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Speaker 5: buy T bills and let that roll off. So the

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Speaker 5: price action that occurred during that period of time April

430
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Speaker 5: seventh to April eleventh didn't react like one would expect.

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Speaker 5: If you had central banks who were massive sellers of treasuries,

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Speaker 5: you would have expected to see the front end sell off.

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Speaker 5: But no, the front end rallied right, So you saw

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Speaker 5: lower yields in short term debt and higher yields and

435
00:21:33,400 --> 00:21:35,439
Speaker 5: long term debt. I think part of that was an

436
00:21:35,440 --> 00:21:38,200
Speaker 5: inflation trade. I think that a lot of people thought

437
00:21:38,240 --> 00:21:40,560
Speaker 5: and did think. And I was up late some of

438
00:21:40,600 --> 00:21:43,840
Speaker 5: those nights too, talking with clients in Asia and what

439
00:21:43,880 --> 00:21:46,239
Speaker 5: you heard from many of them is, isn't all of

440
00:21:46,240 --> 00:21:49,399
Speaker 5: this just inflationary? Because what Donald Trump and his administration

441
00:21:49,440 --> 00:21:51,960
Speaker 5: are doing is going to force us into recession or

442
00:21:51,960 --> 00:21:54,040
Speaker 5: he's going to fire Powell. And if he thought does that,

443
00:21:54,160 --> 00:21:56,920
Speaker 5: then interest rates are going to be too low, tariffs

444
00:21:56,920 --> 00:21:59,520
Speaker 5: are going to keep inflation higher. So that all was

445
00:21:59,560 --> 00:22:02,359
Speaker 5: a curve, and that's really the trade that you saw.

446
00:22:02,400 --> 00:22:04,280
Speaker 5: You saw that twist deepening of the yield curve.

447
00:22:05,280 --> 00:22:08,000
Speaker 3: By the way, listeners, especially those who have come new

448
00:22:08,160 --> 00:22:11,200
Speaker 3: to odd Lots, either in recent weeks or recent years,

449
00:22:11,600 --> 00:22:13,960
Speaker 3: should really go back to I think it was twenty nineteen,

450
00:22:14,040 --> 00:22:17,080
Speaker 3: right Tracy with Brad Setzer, one of our legendary episodes

451
00:22:17,119 --> 00:22:22,040
Speaker 3: about Taiwan Life insurers and their voracious appetite for US

452
00:22:22,119 --> 00:22:24,720
Speaker 3: treasuries and the role that the Central Bank of the

453
00:22:24,760 --> 00:22:28,439
Speaker 3: Republic of China, which is Taiwan's central bank plays.

454
00:22:28,680 --> 00:22:31,600
Speaker 2: The closest thing we've ever done to a true crime podcast.

455
00:22:31,640 --> 00:22:34,080
Speaker 4: Yeah exactly. We're not alleging any crime, but it was.

456
00:22:36,280 --> 00:22:36,680
Speaker 5: Misery.

457
00:22:36,720 --> 00:22:39,440
Speaker 3: I had that sense of mystery when anyway, people should

458
00:22:39,440 --> 00:22:40,680
Speaker 3: go back to this one of the all.

459
00:22:40,560 --> 00:22:42,560
Speaker 4: Time great episodes.

460
00:22:43,240 --> 00:22:46,920
Speaker 3: Going back again the night of April eighth, this inflation

461
00:22:47,160 --> 00:22:50,639
Speaker 3: trade idea, I mean, because you mentioned and it was

462
00:22:50,720 --> 00:22:53,760
Speaker 3: very helpful that these were hours of low liquidity. London

463
00:22:53,840 --> 00:22:57,160
Speaker 3: hadn't opened yet, the dealer balance sheets are already priced

464
00:22:57,200 --> 00:22:59,800
Speaker 3: up to the gills, not really inclined to take on

465
00:23:00,200 --> 00:23:03,159
Speaker 3: treasuries in that moment. But it still raises the question

466
00:23:03,760 --> 00:23:07,800
Speaker 3: of the impetus for the selling by the marginal traders

467
00:23:07,840 --> 00:23:09,879
Speaker 3: at the time, why they were selling in the first place,

468
00:23:10,240 --> 00:23:13,280
Speaker 3: as opposed to buying safe haven asset, because that's often

469
00:23:13,280 --> 00:23:15,679
Speaker 3: what you do when the stock market is selling. Is

470
00:23:15,720 --> 00:23:17,720
Speaker 3: it essential? And it sort of sounded like in your

471
00:23:17,760 --> 00:23:20,119
Speaker 3: last answer that it was just a mini version of

472
00:23:20,119 --> 00:23:23,520
Speaker 3: that twenty twenty two dynamic where if you have bad

473
00:23:23,640 --> 00:23:27,040
Speaker 3: growth outcomes and sort of bad inflation outcomes, you sell

474
00:23:27,080 --> 00:23:28,879
Speaker 3: stocks and treasuries at the same time.

475
00:23:29,280 --> 00:23:31,600
Speaker 5: Yeah, if that's if you're looking for a fundamental reason,

476
00:23:31,600 --> 00:23:34,280
Speaker 5: I would say that that would have been the fundamental impetus.

477
00:23:34,480 --> 00:23:37,119
Speaker 5: But I suspect much of it is just positioning. Like, okay,

478
00:23:37,359 --> 00:23:40,040
Speaker 5: I think what is underappreciated. You know, some people say

479
00:23:40,040 --> 00:23:41,800
Speaker 5: that this is just a cop out by you know,

480
00:23:41,840 --> 00:23:43,879
Speaker 5: some strategist who doesn't know what's going on, And I

481
00:23:43,880 --> 00:23:46,920
Speaker 5: can appreciate that a little bit, but positioning does matter.

482
00:23:47,000 --> 00:23:49,280
Speaker 5: So if there were people who were long treasuries in

483
00:23:49,400 --> 00:23:51,840
Speaker 5: Asia at Asia hours, like let's say that it's a

484
00:23:51,880 --> 00:23:54,880
Speaker 5: sovereign wealth fund or an asset manager in Hong Kong

485
00:23:54,960 --> 00:23:58,120
Speaker 5: or Singapore who was long ten year treasuries and thirty

486
00:23:58,200 --> 00:24:01,040
Speaker 5: year treasuries because they thought US was going to have

487
00:24:01,080 --> 00:24:03,159
Speaker 5: a recession and we were going to have lower interest

488
00:24:03,240 --> 00:24:05,720
Speaker 5: rates and all of that. And all of a sudden,

489
00:24:05,760 --> 00:24:08,320
Speaker 5: you hear everything coming out of New York. You wake

490
00:24:08,400 --> 00:24:10,840
Speaker 5: up in the morning and you say, maybe I have

491
00:24:10,920 --> 00:24:13,520
Speaker 5: too much risk on and then you try to take

492
00:24:13,560 --> 00:24:15,800
Speaker 5: off some of that risk in a market that's not

493
00:24:16,000 --> 00:24:19,119
Speaker 5: able to absorb that risk because dealer balance sheets are

494
00:24:19,160 --> 00:24:23,000
Speaker 5: completely anelastic the price then has to move pretty dramatically,

495
00:24:23,280 --> 00:24:25,320
Speaker 5: and you've seen that over different periods of time. Look,

496
00:24:25,520 --> 00:24:28,720
Speaker 5: the Treasury Department right now holds a conference every year

497
00:24:28,840 --> 00:24:31,840
Speaker 5: that I attend very regularly, not every year, but probably

498
00:24:31,840 --> 00:24:35,000
Speaker 5: two out of every three years about resilience of the

499
00:24:35,040 --> 00:24:38,640
Speaker 5: treasury market. And that all stemmed from about ten years ago.

500
00:24:39,000 --> 00:24:42,760
Speaker 5: We had the flash rally where US treasuries rallied fifty

501
00:24:42,800 --> 00:24:46,760
Speaker 5: basis points in fifteen minutes on no news right on nothing.

502
00:24:47,240 --> 00:24:50,160
Speaker 5: So why would that have happened. Well, it's because, well

503
00:24:50,200 --> 00:24:51,000
Speaker 5: the rumor was.

504
00:24:51,000 --> 00:24:54,159
Speaker 2: That it was something happening, right, but no one was

505
00:24:54,200 --> 00:24:55,919
Speaker 2: ever able to prove it correct.

506
00:24:56,000 --> 00:24:58,320
Speaker 5: Yeah, and look I met with the Treasury Department at

507
00:24:58,359 --> 00:25:00,560
Speaker 5: that time. I sat on a dealer and one of

508
00:25:00,560 --> 00:25:03,360
Speaker 5: the what was then one of the major treasury dealers,

509
00:25:03,720 --> 00:25:06,200
Speaker 5: and you know, nobody exactly knew what was going on,

510
00:25:06,240 --> 00:25:07,840
Speaker 5: but there was trading that was going on. It was

511
00:25:07,880 --> 00:25:10,439
Speaker 5: just a very small size. No one was willing to

512
00:25:10,440 --> 00:25:13,280
Speaker 5: take on, you know, basically short the market in a

513
00:25:13,359 --> 00:25:16,240
Speaker 5: very significant way. And this was in some ways just

514
00:25:16,280 --> 00:25:19,359
Speaker 5: the opposite of that. And as the treasury market's gotten bigger,

515
00:25:19,440 --> 00:25:22,159
Speaker 5: keep in mind the treasury market's nearly thirty trillion dollars

516
00:25:22,200 --> 00:25:26,040
Speaker 5: of marketable debt outstanding, of which about twenty three trillion

517
00:25:26,160 --> 00:25:29,160
Speaker 5: dollars is coupon, so not te bills. I always take

518
00:25:29,200 --> 00:25:31,000
Speaker 5: T bills out of this equation, by the way, because

519
00:25:31,040 --> 00:25:32,720
Speaker 5: when people say, oh, there's this wall of debt that

520
00:25:32,800 --> 00:25:35,200
Speaker 5: has to be refinanced this year, the fact is seven

521
00:25:35,240 --> 00:25:37,399
Speaker 5: trillion of that or near seven trillion of that is

522
00:25:37,440 --> 00:25:38,640
Speaker 5: treasury bills.

523
00:25:38,520 --> 00:25:39,000
Speaker 4: That's good to know.

524
00:25:39,160 --> 00:25:41,920
Speaker 5: And with two A seven money market funds having seven

525
00:25:41,960 --> 00:25:45,000
Speaker 5: trillion dollars and only allowed to buy treasuries or do

526
00:25:45,080 --> 00:25:48,680
Speaker 5: treasury repurchase agreements, they're not a rollover risk. So take

527
00:25:48,760 --> 00:25:51,359
Speaker 5: take T bills out of the equation, because the reason

528
00:25:51,400 --> 00:25:53,760
Speaker 5: why Treasury issues all those tea bills is because that's

529
00:25:53,800 --> 00:25:56,320
Speaker 5: where demand is. They would issue less if there was

530
00:25:56,400 --> 00:26:00,400
Speaker 5: less demand. But there is a significant amount of treasuries

531
00:26:00,400 --> 00:26:02,160
Speaker 5: that need to be rolled over every year. Right There's

532
00:26:02,440 --> 00:26:04,639
Speaker 5: you know, half a trillion dollars to a trillion dollars

533
00:26:04,680 --> 00:26:07,760
Speaker 5: every year of coupons that mature need to be rolled

534
00:26:07,800 --> 00:26:10,760
Speaker 5: over just about every quarter. So when you're in a

535
00:26:10,800 --> 00:26:13,400
Speaker 5: situation like that and you're treasury dealer and you have

536
00:26:13,480 --> 00:26:16,320
Speaker 5: to bid at these auctions, you have to save some room,

537
00:26:16,760 --> 00:26:19,600
Speaker 5: and you can't always be full on treasuries, and you

538
00:26:19,600 --> 00:26:22,480
Speaker 5: don't want to get full on treasuries at midnight. If

539
00:26:22,520 --> 00:26:25,320
Speaker 5: you're again like one of the bulch bracket banks and

540
00:26:25,800 --> 00:26:28,280
Speaker 5: the overnight trader in Hong Kong, the last thing you

541
00:26:28,280 --> 00:26:29,840
Speaker 5: want to do is get a tap on your shoulder

542
00:26:29,920 --> 00:26:32,680
Speaker 5: from a risk manager and have that risk manager say

543
00:26:32,680 --> 00:26:34,320
Speaker 5: to you, hey, you broke your budget. You know the

544
00:26:34,359 --> 00:26:37,440
Speaker 5: door's over there. So there's career risk involved in all

545
00:26:37,480 --> 00:26:39,480
Speaker 5: of this as well, which I think is also a

546
00:26:39,520 --> 00:26:43,760
Speaker 5: second thing that's underappreciated is just mentality of trading desks

547
00:26:43,800 --> 00:26:47,000
Speaker 5: is meaningfully different than it was again before Basle, because

548
00:26:47,200 --> 00:26:50,520
Speaker 5: risk managers run the market now, not traders, and I

549
00:26:50,560 --> 00:26:53,080
Speaker 5: think that that's also something else that's underappreciated by a

550
00:26:53,080 --> 00:27:05,080
Speaker 5: lot of people.

551
00:27:08,640 --> 00:27:12,439
Speaker 2: I take the point about career risk and dealer capacity

552
00:27:12,480 --> 00:27:15,399
Speaker 2: for risk being more constrained than it was pre some

553
00:27:15,560 --> 00:27:18,359
Speaker 2: of the Basil rules, but it does strike me just

554
00:27:18,400 --> 00:27:21,600
Speaker 2: getting back to the sort of existential angst when it

555
00:27:21,640 --> 00:27:25,159
Speaker 2: comes to demand for US treasuries. We have seen some

556
00:27:25,359 --> 00:27:28,280
Speaker 2: figures that suggest that we just saw, you know, like

557
00:27:28,520 --> 00:27:32,160
Speaker 2: run of the mill selling of US treasury. So for instance,

558
00:27:32,200 --> 00:27:37,040
Speaker 2: we had Japan's Ministry of Finance showing that private investors

559
00:27:37,080 --> 00:27:39,919
Speaker 2: in the country sold like seventeen point five billion in

560
00:27:40,040 --> 00:27:44,040
Speaker 2: long term bonds in the week this was ended April fourth.

561
00:27:44,040 --> 00:27:46,040
Speaker 2: I actually needed to go and look at what the

562
00:27:46,040 --> 00:27:50,640
Speaker 2: week after happened. But even before then, Japan's private sellers

563
00:27:50,640 --> 00:27:53,120
Speaker 2: they sold a bunch of US bonds, like literally right

564
00:27:53,280 --> 00:27:57,720
Speaker 2: before early November when we had the election, And if

565
00:27:57,720 --> 00:27:59,520
Speaker 2: we look at some of the commentary we've seen from

566
00:27:59,560 --> 00:28:02,720
Speaker 2: analysts over the years, there's a lot of discussion of

567
00:28:02,920 --> 00:28:09,639
Speaker 2: a lack of structural demand for US treasuries, especially overseas. Right, Like,

568
00:28:10,119 --> 00:28:12,800
Speaker 2: some of the foreign buyers that were buying US debt

569
00:28:13,200 --> 00:28:15,840
Speaker 2: a decade or two decades or three decades ago just

570
00:28:15,920 --> 00:28:19,240
Speaker 2: aren't buying as much of it as they used to

571
00:28:19,280 --> 00:28:22,120
Speaker 2: talk to us about. Like the I guess long term

572
00:28:22,240 --> 00:28:25,879
Speaker 2: outlook for US treasury demand, where is that going to

573
00:28:25,920 --> 00:28:29,119
Speaker 2: be coming from? And how true is it that we

574
00:28:29,200 --> 00:28:31,879
Speaker 2: have seen a bit of a rebalancing from foreign to

575
00:28:32,000 --> 00:28:33,200
Speaker 2: domestic sources.

576
00:28:33,800 --> 00:28:37,720
Speaker 5: Well, we certainly have seen a massive shift away from

577
00:28:38,080 --> 00:28:40,120
Speaker 5: Keep in mind about ten years ago, and I can

578
00:28:40,120 --> 00:28:44,120
Speaker 5: get the exact number later, but about ten years ago,

579
00:28:44,240 --> 00:28:48,920
Speaker 5: about half of US debt was owned by foreigners. Now again,

580
00:28:49,200 --> 00:28:51,880
Speaker 5: most of that was it was split out pretty evenly

581
00:28:51,920 --> 00:28:54,720
Speaker 5: between central banks and private investors in terms of the

582
00:28:54,840 --> 00:28:57,360
Speaker 5: risk that they owned. And we talk about risk, not

583
00:28:57,400 --> 00:29:01,400
Speaker 5: necessarily the notional value, because we care about you know,

584
00:29:01,480 --> 00:29:03,680
Speaker 5: who's buying the riskier parts of the market. So ten

585
00:29:03,800 --> 00:29:05,960
Speaker 5: years and thirty year debt, for example, you can buy

586
00:29:06,000 --> 00:29:09,040
Speaker 5: a little bit of that and effectively buy a lot

587
00:29:09,080 --> 00:29:14,360
Speaker 5: of risk the central banks have certainly been diversifying their portfolios,

588
00:29:14,360 --> 00:29:16,280
Speaker 5: and I think that this makes a lot of sense.

589
00:29:16,320 --> 00:29:18,280
Speaker 5: Right if you were a central bank and you said

590
00:29:18,320 --> 00:29:22,000
Speaker 5: fifteen years ago, you said, oh, ninety plus percent of

591
00:29:22,040 --> 00:29:25,400
Speaker 5: our foreign exchange reserves are all in US dollars, but

592
00:29:25,400 --> 00:29:28,080
Speaker 5: we only do fifty percent of our business our trade

593
00:29:28,520 --> 00:29:31,080
Speaker 5: in the US dollar. We do a lot in euros,

594
00:29:31,080 --> 00:29:33,239
Speaker 5: and we do a lot in yen, right, so we

595
00:29:33,280 --> 00:29:37,000
Speaker 5: want to diversify our foreign exchange holdings. That's something that

596
00:29:37,040 --> 00:29:38,920
Speaker 5: has been going on for better part of a decade,

597
00:29:38,920 --> 00:29:43,040
Speaker 5: and in fact, aggregate ownership of US treasuries has actually

598
00:29:43,320 --> 00:29:46,760
Speaker 5: kind of been flatlined, and as a share of the market,

599
00:29:46,800 --> 00:29:49,120
Speaker 5: it's gone way down now. But who's replaced that we

600
00:29:49,200 --> 00:29:50,720
Speaker 5: have to keep it To keep this in mind too,

601
00:29:51,080 --> 00:29:53,000
Speaker 5: and this is to your point, Tracy, I think, is

602
00:29:53,000 --> 00:29:55,560
Speaker 5: like who's going to be the incremental buyer? Because the

603
00:29:55,600 --> 00:29:58,200
Speaker 5: Fed now owns a lot more treasuries than they did, right,

604
00:29:58,240 --> 00:30:01,040
Speaker 5: because they did quantitative ease for the better part of

605
00:30:01,080 --> 00:30:04,960
Speaker 5: three years and they purchased a significant share of the market.

606
00:30:05,040 --> 00:30:07,640
Speaker 5: Now they don't own an unusually high share of the market,

607
00:30:07,760 --> 00:30:10,560
Speaker 5: but in notional terms, it's a very large share. So

608
00:30:11,040 --> 00:30:14,120
Speaker 5: the FED usually owns around twenty percent of the treasury

609
00:30:14,120 --> 00:30:17,640
Speaker 5: market and has basically since the nineteen sixties, Right, It's

610
00:30:17,680 --> 00:30:20,120
Speaker 5: always owned about twenty percent of the market, But now

611
00:30:20,160 --> 00:30:23,280
Speaker 5: the market is so massive, and they were really a

612
00:30:23,520 --> 00:30:27,600
Speaker 5: very large non economic buyer of treasuries that they're hard

613
00:30:27,600 --> 00:30:31,240
Speaker 5: to replace in the market without their being additional. You know,

614
00:30:31,760 --> 00:30:34,120
Speaker 5: I don't love the concept of term premium the way

615
00:30:34,120 --> 00:30:37,160
Speaker 5: that we measure it, but there is term premium right

616
00:30:37,160 --> 00:30:39,560
Speaker 5: in the market, and at some point, term premium has

617
00:30:39,600 --> 00:30:42,840
Speaker 5: to go up if you are not sure where demand

618
00:30:42,920 --> 00:30:45,280
Speaker 5: is going to come from from these longer duration assets,

619
00:30:45,640 --> 00:30:48,720
Speaker 5: and by doing what President Trump's doing, there is a

620
00:30:48,720 --> 00:30:50,520
Speaker 5: fear out there. And I've spoken to a lot of

621
00:30:50,600 --> 00:30:54,560
Speaker 5: investors both here in the US and overseas about is

622
00:30:54,600 --> 00:30:57,680
Speaker 5: there going to be significant demand for treasuries if, say

623
00:30:58,040 --> 00:31:00,840
Speaker 5: to Trump administration's able to get our trade better in

624
00:31:00,880 --> 00:31:04,120
Speaker 5: line the buying of treasuries that you saw back in

625
00:31:04,520 --> 00:31:07,240
Speaker 5: the early two thousands and right after the global financial

626
00:31:07,240 --> 00:31:10,720
Speaker 5: crisis that also coincided with a massive increase to the

627
00:31:10,800 --> 00:31:14,040
Speaker 5: US current account deficit, So we were effectively exporting a

628
00:31:14,080 --> 00:31:17,120
Speaker 5: whole lot of dollars, and as we're exporting those dollars,

629
00:31:17,360 --> 00:31:19,680
Speaker 5: the financial account has to balance, So one of two

630
00:31:19,680 --> 00:31:23,320
Speaker 5: things has to happen. Either people sell the dollar and

631
00:31:23,360 --> 00:31:26,160
Speaker 5: then buy their home currency. Therefore their own currency winds

632
00:31:26,240 --> 00:31:29,520
Speaker 5: up appreciating versus a dollar, and that makes them less competitive,

633
00:31:29,560 --> 00:31:31,920
Speaker 5: and I think that's kind of what President Trump seems

634
00:31:31,960 --> 00:31:34,240
Speaker 5: to want to do at least as one of the

635
00:31:34,600 --> 00:31:38,160
Speaker 5: outcomes of all of this tariff negotiation and trade negotiation.

636
00:31:38,760 --> 00:31:40,680
Speaker 5: Or you have to go out and buy a US

637
00:31:40,760 --> 00:31:43,040
Speaker 5: dollar denominated asset. Now that could be a hard asset,

638
00:31:43,080 --> 00:31:45,920
Speaker 5: it could be corporates, it could be but treasuries are

639
00:31:45,960 --> 00:31:49,120
Speaker 5: the thing that most countries want to own because it's liquid.

640
00:31:49,640 --> 00:31:52,200
Speaker 5: You buy short term treasuries and you kind of know

641
00:31:52,240 --> 00:31:54,240
Speaker 5: you're going to get your money back. You also know

642
00:31:54,240 --> 00:31:56,680
Speaker 5: that you could replace them very easily because there's auctions

643
00:31:57,000 --> 00:31:59,920
Speaker 5: every single month. So there's a whole reason why you

644
00:32:00,400 --> 00:32:02,760
Speaker 5: would want to own treasuries. When the current account bounce

645
00:32:02,800 --> 00:32:05,560
Speaker 5: is massive, go back and just you know, you can

646
00:32:05,560 --> 00:32:08,000
Speaker 5: go on the Bloomberg terminal or go on go on

647
00:32:08,000 --> 00:32:12,400
Speaker 5: to our Bloomberg Intelligence dashboard bi rates and you can

648
00:32:12,480 --> 00:32:16,360
Speaker 5: look at just how much foreigners bought of US debt

649
00:32:16,440 --> 00:32:18,520
Speaker 5: as the current account deficit went up as a current

650
00:32:18,520 --> 00:32:20,600
Speaker 5: account deficit got better. In the second half of the

651
00:32:20,640 --> 00:32:24,360
Speaker 5: twenty teens, you saw that there was significant slowing of

652
00:32:24,400 --> 00:32:27,520
Speaker 5: what foreigners were buying of US dollars because they just

653
00:32:27,560 --> 00:32:29,920
Speaker 5: didn't need to. They had other alternatives and they and

654
00:32:30,080 --> 00:32:32,840
Speaker 5: the current account deficit was significantly lower.

655
00:32:33,240 --> 00:32:34,800
Speaker 4: So I just have one last question.

656
00:32:34,880 --> 00:32:36,280
Speaker 3: I mean, first of all, when it comes to who

657
00:32:36,320 --> 00:32:40,120
Speaker 3: is going to own US treasuries. A. I hear that

658
00:32:40,320 --> 00:32:42,720
Speaker 3: there's a big tax cut plan that's in the works

659
00:32:42,720 --> 00:32:45,920
Speaker 3: in DC, So that's one pocket of people having more

660
00:32:46,000 --> 00:32:49,880
Speaker 3: cash and theoretically marginal buyers. B. You know, you're talking

661
00:32:49,920 --> 00:32:52,920
Speaker 3: about closing the trade deficit. In theory, the only way

662
00:32:52,920 --> 00:32:56,000
Speaker 3: we really closed the trade deficit is with a significant

663
00:32:56,040 --> 00:32:59,440
Speaker 3: fiscal tightening, and so therefore you just have less debt

664
00:32:59,480 --> 00:33:02,280
Speaker 3: to sell. But just on the my last question is,

665
00:33:02,600 --> 00:33:04,960
Speaker 3: you know, Tracy and I are on opposite sides of this,

666
00:33:05,160 --> 00:33:08,560
Speaker 3: the term premium question. I am yet to convinced be

667
00:33:08,680 --> 00:33:10,880
Speaker 3: that it's a useful concept. I like, the old curve

668
00:33:10,960 --> 00:33:12,400
Speaker 3: is the old curve, it's the what.

669
00:33:13,120 --> 00:33:15,200
Speaker 4: It sounds like. You're somewhere in the middle.

670
00:33:15,080 --> 00:33:19,240
Speaker 3: So settle at least the IRA Jersey verdict on how

671
00:33:19,280 --> 00:33:23,080
Speaker 3: we should think about the usefulness or the usefulness of

672
00:33:23,160 --> 00:33:25,520
Speaker 3: measuring this thing called the term premium.

673
00:33:25,600 --> 00:33:28,680
Speaker 5: So the term premium exists. It must exist. But I

674
00:33:28,760 --> 00:33:31,040
Speaker 5: called it the dark matter before some members of the

675
00:33:31,040 --> 00:33:33,800
Speaker 5: Federal Reserve called it the dark matter of the treasury market.

676
00:33:34,280 --> 00:33:36,360
Speaker 5: Term premium has to exist because you have to be

677
00:33:36,520 --> 00:33:40,120
Speaker 5: compensated for risks outside of what the Federal Reserve is

678
00:33:40,160 --> 00:33:43,280
Speaker 5: going to do. And the greater the uncertainty, the greater

679
00:33:43,360 --> 00:33:46,000
Speaker 5: the term premium should be. The farther you go out

680
00:33:46,000 --> 00:33:48,240
Speaker 5: the curve. And that's one of the reasons why the

681
00:33:48,280 --> 00:33:51,040
Speaker 5: yield curve generally is upward sloping. Right, not always, but

682
00:33:51,160 --> 00:33:54,280
Speaker 5: generally it's upward sloping because of the uncertainty about the

683
00:33:54,320 --> 00:33:57,480
Speaker 5: future path of interest rates, and there's you know, there

684
00:33:57,520 --> 00:34:00,760
Speaker 5: is probably a little tiny bit of credit premium in

685
00:34:00,800 --> 00:34:03,760
Speaker 5: that term premium, but really it's a risk premium for

686
00:34:03,840 --> 00:34:07,280
Speaker 5: the unknown going forward. So term premium exists. I think

687
00:34:07,360 --> 00:34:09,520
Speaker 5: I don't love some of the models and the way

688
00:34:09,520 --> 00:34:12,360
Speaker 5: that we actually try to determine term premium. So the

689
00:34:12,400 --> 00:34:15,640
Speaker 5: FED has several different models, like the Adrian Crump model,

690
00:34:15,680 --> 00:34:19,800
Speaker 5: for example, which attempt to quantify what the term premium

691
00:34:19,880 --> 00:34:22,120
Speaker 5: is at any given moment. I like things that you

692
00:34:22,160 --> 00:34:25,680
Speaker 5: can trade, because that's our job. And the problem is

693
00:34:25,760 --> 00:34:28,480
Speaker 5: that if you tried to use the fed's models for

694
00:34:28,680 --> 00:34:30,799
Speaker 5: term premium and said, oh, this looks like it's too

695
00:34:30,840 --> 00:34:33,520
Speaker 5: steep or too flat, and you did those trades, you'd

696
00:34:33,560 --> 00:34:36,200
Speaker 5: lose more than half the time. So they're not particularly

697
00:34:36,280 --> 00:34:39,480
Speaker 5: good predictors of is the market rich or cheap? And

698
00:34:39,560 --> 00:34:43,240
Speaker 5: as investors, that's our job. So they might be interesting

699
00:34:43,280 --> 00:34:45,680
Speaker 5: on an academic basis, but if I can't trade it,

700
00:34:45,800 --> 00:34:48,400
Speaker 5: I don't care about it. And that's why generally speaking,

701
00:34:48,480 --> 00:34:50,879
Speaker 5: I look at the yield curve. I do have my own.

702
00:34:51,280 --> 00:34:53,280
Speaker 5: It's more of a fair value model for the yield

703
00:34:53,280 --> 00:34:55,799
Speaker 5: curve as opposed to a term premium model, but it

704
00:34:55,840 --> 00:34:58,960
Speaker 5: has a similar effect. But you can determine are we

705
00:34:59,040 --> 00:35:02,719
Speaker 5: rich or cheap given the variety of outcomes from both

706
00:35:02,719 --> 00:35:06,319
Speaker 5: the FED reserve and also supply and other inputs that

707
00:35:06,360 --> 00:35:07,640
Speaker 5: we use for those models.

708
00:35:07,920 --> 00:35:10,040
Speaker 2: Joe, you should just admit you were wrong about the

709
00:35:10,120 --> 00:35:13,040
Speaker 2: term premium because we started arguing about this late last

710
00:35:13,120 --> 00:35:15,520
Speaker 2: year early this year when the term premium was going

711
00:35:15,600 --> 00:35:17,400
Speaker 2: up a lot, and you thought it was all about

712
00:35:17,560 --> 00:35:21,440
Speaker 2: Fed expectations, and now now here we are and it's

713
00:35:21,480 --> 00:35:22,279
Speaker 2: still going up.

714
00:35:22,440 --> 00:35:25,759
Speaker 3: I have to admit something that A is completely not

715
00:35:25,960 --> 00:35:30,080
Speaker 3: useful for trading, and B only exists because it theoretically

716
00:35:30,160 --> 00:35:32,799
Speaker 3: has to exist in this world, but we can't observe it.

717
00:35:32,800 --> 00:35:33,880
Speaker 4: Fine, I'll admit it.

718
00:35:33,880 --> 00:35:34,160
Speaker 5: Fine.

719
00:35:34,440 --> 00:35:36,919
Speaker 2: Oh Mike, Okay, Wait, speaking of something else that Joe

720
00:35:36,960 --> 00:35:39,680
Speaker 2: was wrong about. Can we talk about bond market vigilantes

721
00:35:39,800 --> 00:35:42,279
Speaker 2: for a second. So I think there was this expectation

722
00:35:42,840 --> 00:35:46,120
Speaker 2: going into twenty twenty five and the new Trump administration

723
00:35:46,280 --> 00:35:49,160
Speaker 2: that he was going to be all about stock prices,

724
00:35:49,360 --> 00:35:51,600
Speaker 2: and you know, he talked a lot about stock markets

725
00:35:51,600 --> 00:35:55,360
Speaker 2: going up in his first presidency. He kind of suggested

726
00:35:55,440 --> 00:35:58,440
Speaker 2: he wanted stocks to go up in his second presidency,

727
00:35:58,480 --> 00:36:02,640
Speaker 2: and then we saw the big market crash. But you know,

728
00:36:02,719 --> 00:36:05,120
Speaker 2: looking back on it, it kind of feels like bonds

729
00:36:05,160 --> 00:36:07,640
Speaker 2: were the pressure point for him when it comes to

730
00:36:07,800 --> 00:36:11,480
Speaker 2: ratcheting back some of the tariff tenshion. What's the role

731
00:36:11,640 --> 00:36:14,040
Speaker 2: of the bond market, I guess when it comes to

732
00:36:14,760 --> 00:36:17,120
Speaker 2: influencing the new Trump administration.

733
00:36:18,000 --> 00:36:20,920
Speaker 5: I wish we had any real good color about that,

734
00:36:21,000 --> 00:36:24,239
Speaker 5: because that would be very helpful for analyzing what's going

735
00:36:24,320 --> 00:36:27,040
Speaker 5: to come next. I think it matters in many respects.

736
00:36:27,120 --> 00:36:30,120
Speaker 5: In particular, remember they said that, hey, they really want

737
00:36:30,200 --> 00:36:32,279
Speaker 5: to try to get the ten year treasury yield down.

738
00:36:32,800 --> 00:36:37,080
Speaker 5: When Treasury's rallied for the month of February and early March,

739
00:36:37,120 --> 00:36:39,839
Speaker 5: remember President Trump said, oh, look, interest rates are lower. Now,

740
00:36:39,880 --> 00:36:42,239
Speaker 5: that's what we're trying to do. Of course, we've sold

741
00:36:42,280 --> 00:36:45,160
Speaker 5: off since then in March, part because of this risk

742
00:36:45,200 --> 00:36:47,880
Speaker 5: premium that we're talking about, as well as some of

743
00:36:47,880 --> 00:36:50,760
Speaker 5: the structural issues that we discussed earlier in the show.

744
00:36:51,239 --> 00:36:54,080
Speaker 5: I think it matters because, look, the fact is, even

745
00:36:54,080 --> 00:36:57,320
Speaker 5: if the President is able to find half a trillion

746
00:36:57,360 --> 00:36:59,560
Speaker 5: dollars in savings and that sounds so weird to say

747
00:36:59,560 --> 00:37:02,239
Speaker 5: half a tree brillion and still not being big enough

748
00:37:02,320 --> 00:37:04,480
Speaker 5: to kind of matter, you're still going to have trillion

749
00:37:04,520 --> 00:37:07,080
Speaker 5: dollar deficits that need to be funded, not to mention

750
00:37:07,320 --> 00:37:10,560
Speaker 5: rolling over the existing debt that's going to be maturing.

751
00:37:11,000 --> 00:37:13,799
Speaker 5: And as that occurs, you know, you want to get

752
00:37:13,800 --> 00:37:16,920
Speaker 5: the lowest borrowing costs for the taxpayer. So I understand

753
00:37:17,000 --> 00:37:20,360
Speaker 5: that President Trump really would like to see lower tenure yields.

754
00:37:20,360 --> 00:37:22,240
Speaker 5: But one way to do that is to actually issue

755
00:37:22,280 --> 00:37:24,880
Speaker 5: less ten year bonds, right, that's one way, But you

756
00:37:24,920 --> 00:37:29,200
Speaker 5: can't do that unless you really significantly decrease the deficit

757
00:37:29,640 --> 00:37:32,040
Speaker 5: and actually even maybe balance the budget, right, because you're

758
00:37:32,080 --> 00:37:34,319
Speaker 5: going to be issuing more and more. In fact, we're

759
00:37:34,320 --> 00:37:38,399
Speaker 5: coming out with our Treasury Funding report probably right around

760
00:37:38,440 --> 00:37:40,160
Speaker 5: the time that a lot of people listening to this on.

761
00:37:40,600 --> 00:37:43,880
Speaker 5: It'll be on the twenty fifth of April, and next Wednesday,

762
00:37:43,880 --> 00:37:46,799
Speaker 5: the Treasury Department will decide and Scott Bessen and his

763
00:37:47,200 --> 00:37:50,320
Speaker 5: appointees will decide how they're going to fund the deficit.

764
00:37:50,640 --> 00:37:52,840
Speaker 5: And they're still going to be nearly a two trillion

765
00:37:52,880 --> 00:37:55,080
Speaker 5: dollar deficit this year, and he's going to have to

766
00:37:55,120 --> 00:37:58,040
Speaker 5: issue ten year treasuries. So I think that if there's

767
00:37:58,160 --> 00:38:02,919
Speaker 5: not demand from overseas, investors lose faith in the US

768
00:38:03,040 --> 00:38:06,879
Speaker 5: government and its ability to continue to finance the debt.

769
00:38:07,440 --> 00:38:10,160
Speaker 5: That has to worry at any administration, regardless of whether

770
00:38:10,160 --> 00:38:12,280
Speaker 5: it's President Trump or President Biden or whomever.

771
00:38:13,320 --> 00:38:16,640
Speaker 2: All Right, Ira, this is what we call a deliciously

772
00:38:17,000 --> 00:38:20,880
Speaker 2: information data dense episode. So thank you so much for

773
00:38:20,960 --> 00:38:23,280
Speaker 2: coming on. All thoughts, I'm so glad we could finally

774
00:38:23,440 --> 00:38:26,640
Speaker 2: get you on the show, particularly at this exact moment

775
00:38:26,680 --> 00:38:27,000
Speaker 2: in time.

776
00:38:27,120 --> 00:38:29,160
Speaker 3: And thank you so much for taking my side and

777
00:38:29,200 --> 00:38:31,319
Speaker 3: saying I was correct on the term premium. I really

778
00:38:31,360 --> 00:38:33,880
Speaker 3: appreciate you coming on offline lies Lies.

779
00:38:34,320 --> 00:38:43,680
Speaker 5: Absolutely happy to be here.

780
00:38:47,960 --> 00:38:50,040
Speaker 4: That's what I heard, Tracy. Didn't you say I was correct?

781
00:38:50,160 --> 00:38:52,239
Speaker 2: No, you both were wrong. You both said it was

782
00:38:52,280 --> 00:38:55,200
Speaker 2: fed expectations at the time, I was the only one

783
00:38:55,239 --> 00:38:58,359
Speaker 2: who was right. That was a great conversation. And there's

784
00:38:58,400 --> 00:39:01,160
Speaker 2: a lot of technicality in all of this, but like

785
00:39:01,440 --> 00:39:04,360
Speaker 2: part of the story, as Ira was highlighting, is the

786
00:39:04,440 --> 00:39:08,400
Speaker 2: technicalities of like the structure of the US bond market.

787
00:39:08,480 --> 00:39:08,640
Speaker 5: Right.

788
00:39:08,719 --> 00:39:11,919
Speaker 3: This is where we certainly agree, which is that it's

789
00:39:12,040 --> 00:39:15,240
Speaker 3: not always a fudge factor when people talk about technical

790
00:39:15,280 --> 00:39:19,120
Speaker 3: aspects or positioning. I think we both completely agree on this.

791
00:39:19,200 --> 00:39:22,160
Speaker 3: And you can especially that stuff about like just you know,

792
00:39:22,239 --> 00:39:25,640
Speaker 3: the idea of dealers in Asia and why for various

793
00:39:25,640 --> 00:39:28,640
Speaker 3: regulatory reasons and other trade reasons they had all these

794
00:39:29,280 --> 00:39:31,840
Speaker 3: what their balance sheets were. I love that idea that

795
00:39:31,920 --> 00:39:34,880
Speaker 3: like it's the risk managers, not the risk takers, driving

796
00:39:34,960 --> 00:39:35,360
Speaker 3: the market.

797
00:39:35,680 --> 00:39:37,520
Speaker 4: Very useful conversation.

798
00:39:37,040 --> 00:39:37,520
Speaker 5: On that front.

799
00:39:37,640 --> 00:39:39,719
Speaker 2: Yeah, But that said, I mean, I think there are

800
00:39:39,800 --> 00:39:43,680
Speaker 2: still some longer term like changes in structural demand for

801
00:39:43,800 --> 00:39:47,080
Speaker 2: US treasuries. You know, you can go back to reports

802
00:39:47,120 --> 00:39:50,440
Speaker 2: that were published by like it might even have been

803
00:39:50,600 --> 00:39:53,480
Speaker 2: Josh Younger at JP Morgan a few years ago about

804
00:39:53,560 --> 00:39:55,759
Speaker 2: you know, JP Morgan is worried about who's going to

805
00:39:55,840 --> 00:39:58,680
Speaker 2: buy all the US bonds because we have seen that

806
00:39:58,719 --> 00:40:02,280
Speaker 2: structural retreat in receives demand. And if we think about

807
00:40:02,320 --> 00:40:05,400
Speaker 2: what Trump is trying to do right now in terms

808
00:40:05,440 --> 00:40:09,760
Speaker 2: of rebalancing global trade and reducing the US trade deficit,

809
00:40:10,200 --> 00:40:12,439
Speaker 2: it does seem like one of the outcomes of that

810
00:40:12,800 --> 00:40:16,120
Speaker 2: is structurally less demand for US treasury.

811
00:40:16,360 --> 00:40:19,360
Speaker 3: Well, one thing that's really interesting. We're so we're all

812
00:40:19,480 --> 00:40:22,880
Speaker 3: recording this April twenty fourth, and right now the stock

813
00:40:22,920 --> 00:40:26,080
Speaker 3: market is flying today, and actually it's really not that

814
00:40:26,200 --> 00:40:28,239
Speaker 3: far below now. At last I looked, it was only

815
00:40:28,239 --> 00:40:30,520
Speaker 3: three and a half percent below where it was on

816
00:40:30,719 --> 00:40:34,239
Speaker 3: Liberation Day. But we are very close still to the

817
00:40:34,280 --> 00:40:36,719
Speaker 3: bottom of the recent range in the dollar. And so

818
00:40:36,840 --> 00:40:40,080
Speaker 3: one way that that sort of retreat from America trade

819
00:40:40,280 --> 00:40:43,239
Speaker 3: expresses itself, in my mind, is not necessarily through the

820
00:40:43,239 --> 00:40:45,280
Speaker 3: price of the curve or anything, but just the fact

821
00:40:45,280 --> 00:40:47,560
Speaker 3: that like relative to the rest of the world, the

822
00:40:47,640 --> 00:40:49,680
Speaker 3: dollar is less appealing. On one other thing, I just

823
00:40:49,719 --> 00:40:52,240
Speaker 3: want to get in on the question of the treasury

824
00:40:52,280 --> 00:40:55,640
Speaker 3: market's influence on the government. I certainly one hundred percent

825
00:40:55,760 --> 00:40:59,799
Speaker 3: agree with you that the government clearly while it's lower

826
00:41:00,400 --> 00:41:02,480
Speaker 3: and it doesn't like higher yields for all kinds of it.

827
00:41:02,560 --> 00:41:04,399
Speaker 3: They've said it, they've said it's God best and has

828
00:41:04,400 --> 00:41:06,439
Speaker 3: said it. The only reason I don't like the term

829
00:41:06,480 --> 00:41:11,040
Speaker 3: dollar vigilantes is I bon bond vigilantes is that it

830
00:41:11,120 --> 00:41:14,719
Speaker 3: prescribes a level of sort of like agency that I

831
00:41:14,760 --> 00:41:15,840
Speaker 3: don't think is helpful. O.

832
00:41:16,520 --> 00:41:20,040
Speaker 2: Sure, we know, like there was not a single market.

833
00:41:20,200 --> 00:41:24,080
Speaker 3: Why I don't like it as a descriptive frames.

834
00:41:24,120 --> 00:41:26,799
Speaker 2: Look, we're talking about complicated concepts. I think you have

835
00:41:26,880 --> 00:41:30,080
Speaker 2: to have some shorthand here, and I do think, you know, like,

836
00:41:30,239 --> 00:41:34,040
Speaker 2: looking at what happened, it does seem like the administration

837
00:41:34,600 --> 00:41:37,160
Speaker 2: at a minimum, you can say they seem to care

838
00:41:37,160 --> 00:41:40,160
Speaker 2: about rates, which means they care about what bond investors

839
00:41:40,160 --> 00:41:43,080
Speaker 2: are doing. I would like it if there was like

840
00:41:43,160 --> 00:41:46,680
Speaker 2: an actual bond vigilante who you could, like, you know,

841
00:41:46,680 --> 00:41:49,120
Speaker 2: you could flash one of those like Batman signals in

842
00:41:49,160 --> 00:41:51,440
Speaker 2: the sky for the bond vigilante and they would all

843
00:41:51,440 --> 00:41:54,640
Speaker 2: come out and start selling you as treasuries and affect

844
00:41:54,760 --> 00:41:58,719
Speaker 2: change in certain policies that would be interesting anyway, shall

845
00:41:58,760 --> 00:41:59,239
Speaker 2: we leave it there?

846
00:41:59,320 --> 00:41:59,919
Speaker 4: Let's save it there.

847
00:42:00,120 --> 00:42:02,360
Speaker 2: This has been another episode of the aud Loots podcast.

848
00:42:02,480 --> 00:42:05,880
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.

849
00:42:05,600 --> 00:42:08,400
Speaker 3: And I'm Joe Wisenthal. You can follow me at the Stalwart.

850
00:42:08,640 --> 00:42:12,400
Speaker 3: Follow Ira Jersey. He's at Ira f Jersey. Follow our

851
00:42:12,440 --> 00:42:16,600
Speaker 3: producers Kerman Rodriguez at Kerman Erman, Dashel Bennett at dashbod

852
00:42:16,719 --> 00:42:19,920
Speaker 3: and Kele Brooks and Kale Brooks. For more odd Laws content,

853
00:42:19,960 --> 00:42:22,319
Speaker 3: go to Bloomberg dot com slash odd Lots, where we

854
00:42:22,360 --> 00:42:25,120
Speaker 3: have a daily newsletter and all of our episodes, and

855
00:42:25,200 --> 00:42:27,359
Speaker 3: you can chet about all of these topics twenty four

856
00:42:27,360 --> 00:42:30,960
Speaker 3: to seven in our discord with fellow listeners Discord dot

857
00:42:31,000 --> 00:42:32,320
Speaker 3: gg slash od Lots.

858
00:42:32,640 --> 00:42:34,640
Speaker 2: And if you enjoy odd Lots, if you like it

859
00:42:34,680 --> 00:42:37,160
Speaker 2: when Joe and I argue about the existence of the

860
00:42:37,239 --> 00:42:39,880
Speaker 2: term premium, then please leave us a positive review on

861
00:42:39,960 --> 00:42:42,960
Speaker 2: your favorite podcast platform. And remember, if you are a

862
00:42:43,000 --> 00:42:46,120
Speaker 2: Bloomberg subscriber, you can listen to all of our episodes

863
00:42:46,200 --> 00:42:48,759
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864
00:42:48,760 --> 00:42:52,440
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865
00:42:52,640 --> 00:43:10,279
Speaker 2: Thanks for listening in