WEBVTT - What We Learned About Treasuries on the Night of April 8 0:00:02.720 --> 0:00:16.439 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:18.600 --> 0:00:21.560 Hello and welcome to another episode of the Out Thoughts podcast. 0:00:21.640 --> 0:00:24.919 I'm Tracy Alloway and I'm Joe Wisenthal. Joe, one of 0:00:24.920 --> 0:00:28.280 the struggles we're having right now is that so much 0:00:28.320 --> 0:00:31.240 is happening, so much has been going on, that it's 0:00:31.280 --> 0:00:34.440 hard enough to keep up with the immediate news, but 0:00:34.520 --> 0:00:38.080 it's especially hard to stop and kind of ponder and 0:00:38.200 --> 0:00:41.640 analyze what just happened. You sort of move on to 0:00:41.720 --> 0:00:43.640 the next thing immediately, right. 0:00:44.000 --> 0:00:46.680 Well, I've always said hindsight is not twenty twenty because 0:00:46.680 --> 0:00:49.440 we all disagree about things that have happened in the past. 0:00:49.520 --> 0:00:51.760 We know that all the time, So I've always hated 0:00:51.760 --> 0:00:52.800 that cliche. 0:00:52.920 --> 0:00:56.760 But at least from the perspective of podcast co hosts, 0:00:57.080 --> 0:01:00.960 talking about the past removes the risk to some extent 0:01:01.240 --> 0:01:04.440 that the episode we're doing is completely. 0:01:04.000 --> 0:01:05.640 Normal immediately going to be out of it by the 0:01:05.680 --> 0:01:06.400 time it's released. 0:01:06.600 --> 0:01:09.920 Yeah, this is true. Okay, So hopefully this episode will 0:01:09.920 --> 0:01:11.960 still be relevant. I think it will be. We're going 0:01:12.000 --> 0:01:15.240 to talk about what happened in the bond market basically 0:01:15.400 --> 0:01:18.520 in April of twenty twenty five. I think that will 0:01:18.520 --> 0:01:21.520 still be relevant. This was one of the biggest, most 0:01:21.840 --> 0:01:25.600 dramatic things that happened in a market that, really, as 0:01:25.640 --> 0:01:29.319 I like to say, is supposed to be pretty boring, right, Like, 0:01:29.440 --> 0:01:33.199 people buy you as bonds because you want that little 0:01:33.200 --> 0:01:35.800 bit of income. You want to know that you're getting 0:01:35.800 --> 0:01:39.560 your money back, You want some certainty. People don't buy 0:01:39.600 --> 0:01:42.039 it because it's moving around a lot on a day 0:01:42.040 --> 0:01:44.640 to day basis. And yeah, that's exactly what we saw 0:01:44.680 --> 0:01:48.600 happen in April post Trump's Liberation Day on April second, 0:01:48.640 --> 0:01:49.640 So we should talk about. 0:01:49.480 --> 0:01:52.840 It totally, in particular the night of April ninth. Now, 0:01:52.840 --> 0:01:57.080 the tenure yield actually peaked on April eleventh. We're recording 0:01:57.080 --> 0:01:59.800 this April twenty fourth. The recent peak was April eleventh, 0:02:00.080 --> 0:02:02.880 But April ninth I will never forget as the night 0:02:02.920 --> 0:02:05.400 that I got zero sleep because I was just refreshing 0:02:05.440 --> 0:02:08.280 my Bloomberg gap on the couch because I just was 0:02:08.320 --> 0:02:11.079 watching this yield spike and everyone's like, it's China dumping. No, 0:02:11.120 --> 0:02:14.000 it's Japan dumping. No, it's margin calls, and everyone's just 0:02:14.040 --> 0:02:16.919 looking for cash. We need answers for what happened the 0:02:16.960 --> 0:02:17.800 night of April eighth. 0:02:17.840 --> 0:02:20.680 This is already revisionist history, because you're on the record 0:02:20.720 --> 0:02:23.280 saying that you did, in fact fall asleep on your couch, 0:02:23.919 --> 0:02:25.280 and now you're saying you got no sleep. 0:02:25.400 --> 0:02:28.280 So it was late, and the peak was actually, I 0:02:28.320 --> 0:02:29.960 don't know, somewhere in there whatever. 0:02:29.800 --> 0:02:32.680 Points still stands. Stuff was happening in the treasury market, 0:02:32.840 --> 0:02:34.520 and there was a lot of discussion when it was 0:02:34.560 --> 0:02:36.960 happening about what was going on. A lot of people 0:02:37.040 --> 0:02:40.320 reaching for the old bond market boogeyman in the form 0:02:40.400 --> 0:02:43.360 of the basis trade, and then a lot of people 0:02:43.360 --> 0:02:46.600 talking about other things like maybe real money sellers who 0:02:46.880 --> 0:02:48.959 just don't want to be as exposed to US debt 0:02:49.000 --> 0:02:52.120 anymore because of all the uncertainty from Trump and his 0:02:52.240 --> 0:02:55.560 tariff regime, et cetera. So we should talk about it. 0:02:55.760 --> 0:02:59.160 By the way, twelve ten a m. On the morning 0:02:59.240 --> 0:03:02.359 of April ninth was that intermediate peak, So I think 0:03:02.400 --> 0:03:03.560 I was still awake by then. 0:03:03.639 --> 0:03:08.079 Keep going, Okay, now that we've settled the most important 0:03:08.120 --> 0:03:11.480 part of what happened on that particular day, we do, 0:03:11.600 --> 0:03:13.400 in fact have the perfect guest. We're going to be 0:03:13.440 --> 0:03:15.360 speaking with someone who we wanted to get on the 0:03:15.360 --> 0:03:18.520 podcast for a really long time. And shame on us. 0:03:18.560 --> 0:03:21.800 We didn't do it because he's here at Bloomberg and 0:03:21.800 --> 0:03:24.120 he's sort of widely available, so we just kind of 0:03:24.200 --> 0:03:27.040 kept putting it off. But now is the perfect time 0:03:27.120 --> 0:03:28.760 to do this. So we're going to be speaking with 0:03:29.120 --> 0:03:32.920 Ira Jersey. He is, of course, chief Global Interest rate 0:03:32.960 --> 0:03:36.360 strategist for Bloomberg Intelligence, and I'm so glad we can 0:03:36.400 --> 0:03:40.080 finally have him on to talk about everything that's been happening. Iira, 0:03:40.240 --> 0:03:42.160 thank you so much for coming on on lots. 0:03:42.200 --> 0:03:45.240 Thanks very much for having me on. I have to 0:03:45.280 --> 0:03:49.120 admit I am one episode behind, So don't talk about 0:03:49.120 --> 0:03:51.400 your last episode with me, because I'll listen to that 0:03:51.440 --> 0:03:52.240 on my way home today. 0:03:52.360 --> 0:03:54.920 You're saving it for later, Okay, we won't ruin the 0:03:54.920 --> 0:03:58.000 plot of the latest episode. Okay, I guess just a 0:03:58.040 --> 0:04:00.680 color question to start off with, But what have the 0:04:00.720 --> 0:04:03.680 last few weeks been like for you? You know, you're 0:04:03.960 --> 0:04:07.320 the chief rate strategist over at BI. There's been no 0:04:07.360 --> 0:04:10.000 shortage of stuff to write and analyze at the moment. 0:04:10.040 --> 0:04:13.240 How busy has it been and how dramatic is everything 0:04:13.520 --> 0:04:16.040 against your previous experience in bonds? 0:04:16.560 --> 0:04:18.840 Yeah, so we've been talking about this, like, is this 0:04:18.920 --> 0:04:21.279 the busiest couple of weeks that we've ever had, and 0:04:21.360 --> 0:04:23.080 I would go back to the last time that was 0:04:23.080 --> 0:04:27.240 something similar was the September October period of two thousand 0:04:27.240 --> 0:04:29.880 and eight. For me, back in those days, I was 0:04:29.920 --> 0:04:32.200 covering Fanny May and Freddie Mack and obviously they went 0:04:32.240 --> 0:04:35.159 into conservatorship during that period. Then you had the whole 0:04:35.240 --> 0:04:38.480 TARP failure where Congress didn't pass the rescue plan and 0:04:38.480 --> 0:04:41.360 then finally they did, so there were you know, many 0:04:41.440 --> 0:04:44.120 questions about the financial world back then. I think this 0:04:44.200 --> 0:04:47.040 period is a little bit different in that we're talking 0:04:47.080 --> 0:04:49.480 about and you've talked about this on the show already 0:04:49.520 --> 0:04:52.120 over the last few weeks. This is a bit different 0:04:52.200 --> 0:04:55.000 because you're talking about real economy issues as opposed to 0:04:55.040 --> 0:04:58.880 financial economy issues. And because of that, people are wondering, like, 0:04:59.000 --> 0:05:01.159 is there going to be a new world order? What 0:05:01.200 --> 0:05:03.719 does it mean when you get you know, thirty basis 0:05:03.720 --> 0:05:06.680 point spikes in the ten year yield on you know, 0:05:06.800 --> 0:05:09.080 just one tweet. Does that mean that the dollar is 0:05:09.080 --> 0:05:11.160 no longer going to be the reserve currency? These are 0:05:11.160 --> 0:05:14.479 the questions that we continually get and it's difficult to 0:05:14.520 --> 0:05:16.200 say at this point because we don't know what the 0:05:16.279 --> 0:05:19.560 endgame is. But yeah, like you said, Tracy, there's absolutely 0:05:19.960 --> 0:05:21.599 no lack of things to talk about. 0:05:21.880 --> 0:05:25.040 Why would you say this is more uncertain or busy 0:05:25.160 --> 0:05:28.960 than COVID Because then we also saw this big liquidation 0:05:29.240 --> 0:05:33.400 selling in treasuries, We saw an extraordinary effort by the 0:05:33.440 --> 0:05:36.960 FED to come out and stabilize the bond market. What 0:05:37.160 --> 0:05:39.440 is it that puts this more in the category of 0:05:39.480 --> 0:05:42.120 the Great Financial Crisis rather than March twenty twenty. 0:05:42.560 --> 0:05:44.640 Well, I think in March twenty twenty, we all knew 0:05:44.680 --> 0:05:47.360 that there was an issue, and the FED and other 0:05:47.839 --> 0:05:51.479 fiscal agents acted very swiftly because everyone kind of knew 0:05:51.520 --> 0:05:53.440 what the endgame was. We knew that we were going 0:05:53.480 --> 0:05:55.599 to be shut down. We knew that we had to 0:05:55.600 --> 0:05:57.800 figure out some way to live in a world where 0:05:57.800 --> 0:06:00.200 everyone was at home. So I think that that the 0:06:00.440 --> 0:06:02.880 fact that the endgame was kind of understood at the 0:06:02.920 --> 0:06:07.279 time and policymakers acted very quickly because they knew what 0:06:07.440 --> 0:06:10.360 the path would be if they didn't do anything. In 0:06:10.360 --> 0:06:12.680 two thousand and eight, we knew that like, look, if 0:06:12.680 --> 0:06:15.680 TARP didn't pass, what might have happened to the banking 0:06:15.720 --> 0:06:17.960 sector At the time, you just had Leman go under. 0:06:18.000 --> 0:06:20.920 You just had Fanny and Freddie go under. So and yes, 0:06:20.960 --> 0:06:24.080 there was some policy response, but it wasn't enough, Like 0:06:24.120 --> 0:06:27.080 the FED alone wasn't enough to get us out of 0:06:27.120 --> 0:06:30.320 that particular situation. And I think here the issue that 0:06:30.360 --> 0:06:33.080 we have today is there is and we always use 0:06:33.160 --> 0:06:36.279 the term uncertainty, but I think we have to because 0:06:36.360 --> 0:06:39.000 we don't know what the endgame ultimately is, right. We 0:06:39.400 --> 0:06:43.800 don't know is is this the administration's way of getting 0:06:43.880 --> 0:06:46.680 people to the table for things like defense burden sharing. 0:06:46.839 --> 0:06:48.080 Is this the way that for them to get to 0:06:48.160 --> 0:06:51.719 the table to isolate China? Is this the administration's way 0:06:51.839 --> 0:06:54.440 of basically saying that, Hey, we don't know how to 0:06:54.480 --> 0:06:57.599 cut the deficit, so let's focus on international because we 0:06:57.680 --> 0:07:00.240 can do that. And that's in the president's purview as 0:07:00.240 --> 0:07:02.400 opposed to something that Congress has to do. So I 0:07:02.440 --> 0:07:04.560 think that there is a lot of right now uncertainty. 0:07:04.920 --> 0:07:08.039 And I think the moves in the treasury market kind 0:07:08.080 --> 0:07:12.720 of show the fragility of liquidity in the treasury market. 0:07:12.840 --> 0:07:14.400 And there's a lot of reasons for that, and we 0:07:14.440 --> 0:07:17.280 can get wonky. And I've talked about this for over 0:07:17.320 --> 0:07:21.000 a dozen years since the Basil capital rule regulations went 0:07:21.000 --> 0:07:23.720 into effect. But there are a lot of reasons to 0:07:23.800 --> 0:07:26.000 think that we're going to continue to see these bouts 0:07:26.000 --> 0:07:29.840 of volatility in the treasury market because of structural changes, 0:07:29.880 --> 0:07:33.400 and when those structural changes come out like they did 0:07:33.400 --> 0:07:36.920 the last few weeks, you do see these extreme volatility 0:07:36.960 --> 0:07:39.040 events like we did on the seventh of April, Like 0:07:39.080 --> 0:07:40.440 we did on the ninth of April. 0:07:40.880 --> 0:07:44.000 Well, okay, so since Joe brought up twenty twenty and 0:07:44.040 --> 0:07:46.240 the response from the Fed back then, why don't we 0:07:46.280 --> 0:07:48.480 go ahead and let's just talk about the basis change 0:07:48.560 --> 0:07:51.480 because this was the initial thing that everyone kind of 0:07:51.640 --> 0:07:55.760 reached for when we first started seeing these very extreme 0:07:56.040 --> 0:07:58.040 moves in the bond market, and it's sort of the 0:07:58.040 --> 0:08:02.720 bond market equivalent nowadays of you know how everyone says, oh, somewhere, 0:08:02.760 --> 0:08:05.440 a macro pod is blowing up, right, or a pod shop. 0:08:05.760 --> 0:08:08.840 What did I say, macropod multi strategy is blowing up? Yeah, 0:08:08.880 --> 0:08:11.559 pod is blowing up somewhere. And I feel like people 0:08:11.600 --> 0:08:13.640 start talking about the basis trade as soon as there's 0:08:13.680 --> 0:08:17.040 some fall event in US treasuries nowadays. But what are 0:08:17.040 --> 0:08:20.360 we discovering about the basis trade and its role in 0:08:20.720 --> 0:08:23.680 the sell off a few weeks ago in the aftermath 0:08:23.720 --> 0:08:27.160 and with some new numbers and information that's been coming out. 0:08:27.400 --> 0:08:30.600 Yeah, So firstly that the basis trade, if it was 0:08:30.680 --> 0:08:33.480 the culprit, we didn't see it in the data almost 0:08:33.480 --> 0:08:37.040 immediately because we would have seen things like a reduction 0:08:37.160 --> 0:08:40.280 and open interest of treasury futures. It went down a 0:08:40.280 --> 0:08:42.960 little right, open interest fell slightly, but it wasn't the 0:08:43.000 --> 0:08:46.840 type of magnitude that was outside the normal daily volatility, 0:08:46.880 --> 0:08:48.960 So it didn't seem to be that number two. You 0:08:49.000 --> 0:08:53.679 would have seen the futures move significantly more in magnitude 0:08:53.760 --> 0:08:57.000 against cash if it was the treasury futures basis. I 0:08:57.040 --> 0:08:59.480 think that one of the reasons why many people focused 0:08:59.480 --> 0:09:02.240 on this early on was it was something that the 0:09:02.240 --> 0:09:04.880 Federal Reserve and some other policy makers were worried about 0:09:04.880 --> 0:09:07.880 because they are very highly levered trades. But they have 0:09:07.920 --> 0:09:11.120 to be. But why were these trades created? So these 0:09:11.160 --> 0:09:14.440 trades are created because asset managers, in order to comply 0:09:14.640 --> 0:09:18.520 with some of their own liquidity rules, end up having 0:09:18.520 --> 0:09:20.280 a lot of cash on their balance sheet and to 0:09:20.480 --> 0:09:23.480 make up for their duration gap to be closer to 0:09:23.480 --> 0:09:26.800 the Bloomberg Aggregate Index or whatever their benchmark is, they 0:09:26.800 --> 0:09:29.280 go out and buy futures on top of that cash 0:09:29.360 --> 0:09:33.280 instead of buying an actual treasury security. What that means is, 0:09:33.320 --> 0:09:36.240 because it's a future, there has to be a seller 0:09:36.280 --> 0:09:39.480 for every buyer of a futures contract. So that leaves 0:09:39.559 --> 0:09:42.960 others which has to be then levered investors or dealers 0:09:43.480 --> 0:09:47.240 short treasury futures. Now, if you're short of treasury future 0:09:47.480 --> 0:09:49.400 and you don't want to be short treasury future, you 0:09:49.400 --> 0:09:51.079 don't want to be short treasuries, what do you do? 0:09:51.640 --> 0:09:54.679 You have to hedge that somehow, And there's only realistically 0:09:54.760 --> 0:09:57.280 two ways that people hedge. One is you can buy 0:09:57.280 --> 0:10:00.480 a treasury or you can receive in an interest rate swap, 0:10:00.640 --> 0:10:03.080 and that's what we call an invoice spread. So it's 0:10:03.559 --> 0:10:06.800 futures versus swaps is called an invoice spread. We can 0:10:06.840 --> 0:10:08.640 go back to the history of the nineteen eighties about 0:10:08.800 --> 0:10:11.440 how that got its name, but I think that's unimportant 0:10:11.440 --> 0:10:14.200 for this discussion. So what you did see during that 0:10:14.240 --> 0:10:17.920 period of time was not so much the treasury futures 0:10:17.960 --> 0:10:21.280 basis trade unwinding, but you saw the swap spread portion 0:10:21.400 --> 0:10:24.600 of that trade unwinding. And that's one reason why everyone 0:10:24.640 --> 0:10:28.199 talked about the treasury futures basis, but it really if 0:10:28.240 --> 0:10:30.280 you looked at the price action, it was really the 0:10:30.320 --> 0:10:33.320 swap market that was moving around ten basis points at 0:10:33.320 --> 0:10:36.679 a clip, just on every single headline, every single tweet. 0:10:36.960 --> 0:10:39.800 And I think that that's more reflective of the leverage 0:10:39.840 --> 0:10:42.120 that was being unwound, was more in the over the 0:10:42.120 --> 0:10:45.120 counter swap market as opposed to in the futures. Well, 0:10:45.120 --> 0:10:47.480 I was about say, future's pits is not really pits anymore, but. 0:10:49.120 --> 0:10:50.120 We get it, we get it. 0:10:50.600 --> 0:10:54.160 So just on the swap spreads point, this was basically 0:10:54.440 --> 0:10:58.480 the bank deregulation trade slash duration trade that a lot 0:10:58.480 --> 0:11:01.840 of people put on posts Trump's win in November. 0:11:01.880 --> 0:11:05.120 That's my understanding, correct, Yeah, and we did too. So 0:11:05.360 --> 0:11:09.600 after President Trump won, the expectation was that the enhanced 0:11:09.640 --> 0:11:12.920 supplementary leverage ratio would be removed and that would allow 0:11:12.960 --> 0:11:15.920 banks to own more treasuries. So therefore, if they could 0:11:15.920 --> 0:11:19.280 own more treasuries instead of receiving and interest rate swaps 0:11:19.320 --> 0:11:21.880 to get a little bit more duration to hedge other things, 0:11:22.200 --> 0:11:25.080 they could buy treasuries out right instead. So most people, 0:11:25.360 --> 0:11:28.480 both strategists as well as market participants were putting on 0:11:28.520 --> 0:11:32.040 swapspread wideners. So swapspreads have been negative even when we 0:11:32.040 --> 0:11:34.000 still have libor. So now we use something called SO 0:11:34.200 --> 0:11:36.960 for the secured overnight financing rate, which is basically the 0:11:36.960 --> 0:11:39.640 repurchase agreement market that's used as the underlying for these 0:11:39.679 --> 0:11:42.719 interest rate swaps. It used to be libor. Even when 0:11:42.720 --> 0:11:45.840 it was libor, swap spreads in the long end especially 0:11:45.880 --> 0:11:49.440 were very negative, and the reason for that was the 0:11:49.480 --> 0:11:52.360 new regulations that went into effect again, both dot frank 0:11:52.480 --> 0:11:56.960 and some basle regulations, plus a very underappreciated part of 0:11:56.960 --> 0:12:00.679 the market, which is insurance company regulations, which are often 0:12:00.720 --> 0:12:04.360 regulated by states, not by the federal government. So when 0:12:04.400 --> 0:12:07.080 states said, oh, you have to have a more diversified 0:12:07.120 --> 0:12:11.840 portfolio of credits within your general account for life insurance 0:12:11.840 --> 0:12:14.880 companies or p and C property and casualty insurers we 0:12:14.920 --> 0:12:18.880 call them p and C insurres, they go out and say, okay, 0:12:18.880 --> 0:12:22.480 we want to buy thirty year single a corporate debt. Well, 0:12:22.840 --> 0:12:24.480 if you want to be diversified and be in one 0:12:24.520 --> 0:12:27.080 hundred different names, there's not one hundred names that your 0:12:27.120 --> 0:12:29.599 credit analysts are going to let you be in and 0:12:30.280 --> 0:12:33.480 allow you to buy that issue thirty year debt. So 0:12:33.559 --> 0:12:36.120 what happens is they end up having to buy ten 0:12:36.160 --> 0:12:38.560 year debt or even five year debt in some cases, 0:12:38.880 --> 0:12:42.040 and that leaves these insurance companies with this massive duration 0:12:42.160 --> 0:12:45.480 gap because they have long term liabilities. Right life insurance 0:12:45.640 --> 0:12:48.960 contracts are very long term liabilities. They need to hedge 0:12:49.000 --> 0:12:51.600 that with having their own long term assets on their 0:12:51.600 --> 0:12:55.000 balance sheet, and that ten year corporate doesn't meet that need. 0:12:55.400 --> 0:12:59.000 So how then does an insurance company end up making 0:12:59.120 --> 0:13:01.080 up that duration gap? And the answer is they receive 0:13:01.120 --> 0:13:04.160 an interest rate swaps because it's capital efficient. When you 0:13:04.240 --> 0:13:07.839 start an interest rate swap, your cost is zero as 0:13:07.880 --> 0:13:10.000 opposed to going out and buying a treasury or even 0:13:10.000 --> 0:13:12.800 buying a treasury strip, so as zero coupon long term 0:13:12.840 --> 0:13:15.640 treasury we call them treasury strips. They don't want to 0:13:15.640 --> 0:13:18.280 do that because it's not balance sheet efficient. So that's 0:13:18.360 --> 0:13:21.080 kept swap spreads negative. But what kept swapsharp is even 0:13:21.120 --> 0:13:24.000 more negative, was the fact that banks couldn't own enough 0:13:24.000 --> 0:13:26.839 treasuries in order to kind of hedge their own short 0:13:26.840 --> 0:13:30.280 exposure to interest rate swap. So it's underappreciated how much 0:13:30.440 --> 0:13:34.120 bank and bank balance sheets really matter to the pricing 0:13:34.120 --> 0:13:46.400 of a lot of these trades and security. 0:13:51.120 --> 0:13:52.880 First of all, I just think this is great, and. 0:13:52.760 --> 0:13:55.480 This is really clear as clear as these kind of 0:13:55.480 --> 0:13:56.439 conversations can get. 0:13:56.559 --> 0:13:57.439 This is really helpful. 0:13:57.480 --> 0:13:57.640 You know. 0:13:57.679 --> 0:13:59.000 One of the things when people. 0:13:58.760 --> 0:14:01.400 Hear about these sort of like various trades that are 0:14:01.520 --> 0:14:03.640 basis trade that are going on, they're like, oh, they're 0:14:03.679 --> 0:14:06.360 leveraged sixty to one, and like, oh, they're just gambling. 0:14:06.400 --> 0:14:08.520 And sometimes you hear about all the FED having to like, 0:14:08.679 --> 0:14:10.959 you know, sort of stabilize the system. They're all these 0:14:10.960 --> 0:14:14.640 regular speculators putting on insane leverage for picking up pennies 0:14:14.640 --> 0:14:16.920 and now they're being backstopped. And what I like about 0:14:16.960 --> 0:14:22.360 your explanation or your characterization is they're economic rationales for 0:14:22.440 --> 0:14:25.480 this trade because it often gets flattened into speculation and 0:14:25.560 --> 0:14:29.200 a casino. But various entities, whether it's the banks meeting 0:14:29.240 --> 0:14:33.480 their regulatory obligations, the insurance companies are meeting their regulatory obligations, 0:14:33.840 --> 0:14:37.560 there are real rationales for the existence of these markets 0:14:37.640 --> 0:14:38.880 rooted in economics. 0:14:38.960 --> 0:14:41.880 Well, there's also a utility value, which is why arguably, 0:14:42.000 --> 0:14:44.440 even though regulators are very aware of this you have 0:14:44.440 --> 0:14:47.360 been worried about it, they haven't exactly done anything to 0:14:47.880 --> 0:14:49.040 really like clamp down on it. 0:14:49.200 --> 0:14:49.760 No, totally. 0:14:49.840 --> 0:14:53.320 Like these markets serve economic purpose in a way that 0:14:53.400 --> 0:14:56.440 sometimes I think doesn't come through. Let's go to the 0:14:56.560 --> 0:14:59.080 night that I fell asleep on my couch. 0:14:59.160 --> 0:15:02.120 You know, there's the night that shall forever be known 0:15:02.240 --> 0:15:04.400 as Joe falling asleep on his couch while looking. 0:15:04.280 --> 0:15:06.000 At Bloomberg charts that night. 0:15:06.160 --> 0:15:09.280 So when the market's selling off, when treasuries are selling 0:15:09.320 --> 0:15:14.880 off intensely, you know, I think there's like various interpretations 0:15:14.960 --> 0:15:16.960 or people have different ideas. So that's like, oh, it's 0:15:17.040 --> 0:15:21.760 China getting revenge, or it's a steepener trade. There's going 0:15:21.800 --> 0:15:23.960 to be more inflation in the future, and so the 0:15:24.000 --> 0:15:26.480 path of interest rates is going to be higher than 0:15:26.520 --> 0:15:29.240 we otherwise theod thought. And I'm a sort of strict 0:15:29.240 --> 0:15:31.560 constructionist reader of the yield curve, so I always like that. 0:15:32.000 --> 0:15:34.280 And then there's liquidation. Someone has to meet a margin 0:15:34.360 --> 0:15:37.320 call somewhere, pay cash somewhere, and so they have to 0:15:37.320 --> 0:15:41.040 sell their low liquidity treasuries to get a cash or whatever. 0:15:41.440 --> 0:15:44.000 What was I watching on the couch that night. 0:15:44.320 --> 0:15:46.280 Yeah, so I think there were a few things that 0:15:46.320 --> 0:15:49.200 you were watching. One is you were looking at a 0:15:49.280 --> 0:15:51.640 market that was very liquid. Keep in mind when you 0:15:51.640 --> 0:15:54.560 fell asleep on your couch at midnight East Coast time. Yeah, 0:15:54.600 --> 0:15:57.120 London was not yet open. Okay, so you were talking 0:15:57.160 --> 0:16:01.440 about Tokyo and Hong Kong and Singapore were basically the 0:16:01.480 --> 0:16:04.160 liquidity providers at the time in terms of dealer and 0:16:04.200 --> 0:16:07.520 dealer desks, and they're going to be constrained. So even 0:16:07.600 --> 0:16:09.760 if you only had a little tiny bit of selling 0:16:09.880 --> 0:16:12.800 right in terms of volume, if it was all one 0:16:12.840 --> 0:16:16.320 way at the same time, you probably had dealers that 0:16:16.400 --> 0:16:19.240 weren't willing to take on that exposure at that moment. 0:16:19.600 --> 0:16:21.640 And you'll notice on that day, like if you just 0:16:21.640 --> 0:16:24.400 do an inter date chart and do a GP on 0:16:24.440 --> 0:16:26.720 the tenure yield on the Bloomberg terminal. 0:16:26.920 --> 0:16:27.440 I've done it. 0:16:27.920 --> 0:16:30.880 Yeah, you can see as soon as London opened, the 0:16:30.920 --> 0:16:34.480 market actually came back, and the market actually rallied a bit, 0:16:34.640 --> 0:16:37.280 and there wasn't really any headlines at two am New 0:16:37.360 --> 0:16:39.880 York time. But the fact is you had more liquidity. 0:16:39.960 --> 0:16:42.120 So now you had some bottom fissures. Some people said, oh, 0:16:42.160 --> 0:16:44.520 I can now buy a ten year bond two dollars 0:16:44.600 --> 0:16:47.240 cheaper than I could last night, or when the market 0:16:47.240 --> 0:16:49.720 closed yesterday, so you know, let's just cover a short 0:16:49.840 --> 0:16:51.800 or just maybe take a little bit of a punt 0:16:51.800 --> 0:16:54.160 and a long position. And then the market was still 0:16:54.280 --> 0:16:56.320 very volatile after that. And I think part of the 0:16:56.360 --> 0:16:59.640 reason it continued to be volatile was, besides the fact 0:16:59.680 --> 0:17:02.120 that we had all of the tweets on again off 0:17:02.160 --> 0:17:05.360 again tariff talk, is that people don't like to get 0:17:05.400 --> 0:17:08.480 in front of volatility. And the fact is when volatility 0:17:08.520 --> 0:17:11.800 is high, dealers tend to not only widen their bid offers, 0:17:12.040 --> 0:17:15.680 but they also pull back. And another I think underappreciated 0:17:15.760 --> 0:17:17.720 aspect of this too, and again I go back to 0:17:17.960 --> 0:17:21.840 financial sector balance sheets. If you look at dealers, dealers 0:17:21.840 --> 0:17:24.640 were as long treasuries going into this as they've ever been, 0:17:25.119 --> 0:17:28.560 so they own more treasuries than ever in history. Now 0:17:28.680 --> 0:17:31.080 part of that is because the treasuring market is bigger, 0:17:31.400 --> 0:17:33.600 but a lot of these treasuries that they added they 0:17:33.600 --> 0:17:36.919 added within the last six months. So this wasn't like 0:17:37.080 --> 0:17:38.639 it wasn't like it turned on the dime, and it 0:17:38.680 --> 0:17:41.560 wasn't very systemic. But the fact that there was a 0:17:41.600 --> 0:17:44.040 lot of cash already on dealers balance sheets and still 0:17:44.080 --> 0:17:47.280 is dealers are still very long cash bonds right now, 0:17:47.480 --> 0:17:49.400 and again there are short futures on the other side 0:17:49.440 --> 0:17:51.800 of that, It probably meant that they weren't able to 0:17:51.840 --> 0:17:54.879 take on a lot more supply without getting approvals. Right, 0:17:54.920 --> 0:17:56.960 you have to go to your risk manager and say, hey, 0:17:57.000 --> 0:17:59.359 we'd like to make markets here, but we're fall like 0:17:59.440 --> 0:18:01.959 can we make markets? So there are a certain amount 0:18:02.040 --> 0:18:05.119 of regulatory arbitrage that you can't do today that you 0:18:05.200 --> 0:18:08.320 were able to do prior to the Basle three capital 0:18:08.359 --> 0:18:12.639 rules going into effect. It's what I call balance gad elasticity. Basically, 0:18:12.760 --> 0:18:15.760 dealers don't have the same type of balance sheet elasticity 0:18:16.119 --> 0:18:18.080 as they used to have prior to Basil two and 0:18:18.119 --> 0:18:19.520 a half in Basil three rules. 0:18:19.680 --> 0:18:23.359 Right, So I hate this term. But people are asking 0:18:23.440 --> 0:18:26.840 questions about what real money investors did in all of this, 0:18:27.040 --> 0:18:29.679 and you know, money is money in my book. But 0:18:29.880 --> 0:18:31.760 the idea of you know, I guess people that are 0:18:31.800 --> 0:18:35.040 holding these things on a longer term basis these real 0:18:35.080 --> 0:18:38.520 money investors. And this to me is actually like, this 0:18:38.560 --> 0:18:41.199 is the scenario that could be more worrying than a 0:18:41.240 --> 0:18:44.760 basis trade blow up, because like, okay, basis trades blow up, 0:18:44.840 --> 0:18:47.679 the FED can basically come in and do something pretty 0:18:47.680 --> 0:18:51.720 easily nowadays, and we're talking about a single levered trade 0:18:51.960 --> 0:18:55.440 that's based on arbitraging, like a very technical relationship that's 0:18:55.760 --> 0:18:58.400 blowing out, and so all of those positions are getting 0:18:58.480 --> 0:19:03.000 changed very rapidly. But if we're talking about the collapse 0:19:03.200 --> 0:19:07.879 of a real money investment in US debt because of 0:19:07.920 --> 0:19:11.679 all this policy uncertainty and people wanting to I guess 0:19:11.680 --> 0:19:15.480 dedollarize their balance sheets, that seems much more existential to me. 0:19:15.600 --> 0:19:17.960 So what have you observed in the case of real 0:19:18.000 --> 0:19:19.000 money investors? 0:19:19.320 --> 0:19:21.439 So it depends on how you define real money. So 0:19:21.440 --> 0:19:23.800 I agree with you Tracy there. You know, you're talking 0:19:23.800 --> 0:19:27.639 about central banks, sovereign wealth funds, action managers, you know, 0:19:27.760 --> 0:19:30.080 pension funds and the like, right, so, and they all 0:19:30.119 --> 0:19:33.920 have different economic reasons why they participate in the bond 0:19:33.960 --> 0:19:36.919 market in general and the treasury market in particular. So 0:19:37.080 --> 0:19:40.119 we can go through each of those very briefly. So first, 0:19:40.359 --> 0:19:42.560 you know, it's not obvious to me that central banks 0:19:42.560 --> 0:19:44.680 were selling. So this idea that you know, Joe brought 0:19:44.760 --> 0:19:46.320 up some one of the things that people were saying, 0:19:46.720 --> 0:19:49.400 that oh it's China selling. 0:19:49.280 --> 0:19:50.360 Kind of dumping treasury. 0:19:50.880 --> 0:19:53.280 Yeah, and the fact is is that And I'm not 0:19:53.320 --> 0:19:55.679 going to talk specifically about China, but central banks in 0:19:55.760 --> 0:20:00.280 general when they own treasuries for their reserve account. So 0:20:00.320 --> 0:20:02.639