WEBVTT - Lots More with Matt Levine and Mike Mackenzie 0:00:00.200 --> 0:00:02.120 I want to talk about the Basis Trade. I have 0:00:02.160 --> 0:00:07.320 a song from Basis Basis Trade, Basis Trade. I want 0:00:07.360 --> 0:00:10.800 to talk about the Basis Trade. Let's do that. Matt, 0:00:10.800 --> 0:00:11.760 you've been writing about this. 0:00:12.320 --> 0:00:14.760 I have you have to. I feel like you've been 0:00:14.760 --> 0:00:15.760 writing that for years. 0:00:15.960 --> 0:00:19.800 Well, so can I just say I commissioned the first 0:00:19.800 --> 0:00:22.200 story about the Basis trade when it blew up in 0:00:22.239 --> 0:00:25.239 March twenty twenty, and Steven Spratt actually wrote it, but 0:00:25.320 --> 0:00:28.080 I like helped him with it and gave him a 0:00:28.080 --> 0:00:30.480 bunch of stuff from Josh Younger at JP Morgan at 0:00:30.480 --> 0:00:32.960 the time. Actually, I kind of regret not putting my 0:00:33.040 --> 0:00:35.040 name on that story because of course it became this 0:00:35.159 --> 0:00:37.400 huge thing that everyone's talking about. 0:00:37.560 --> 0:00:39.239 Yeah, everything I know about the Basis trade I got 0:00:39.240 --> 0:00:39.920 from Josh Younger. 0:00:40.000 --> 0:00:41.400 Yeahes not really trade it like, no. 0:00:41.920 --> 0:00:44.199 It's a sort of like philosopher of treasury markets. I 0:00:44.200 --> 0:00:47.640 feel like he he like his philosophy of treasury markets 0:00:47.680 --> 0:00:49.720 has really influenced how I think about the Basis trade. 0:00:49.880 --> 0:00:53.040 So everyone seems up in arms about it, and there's 0:00:53.040 --> 0:00:56.000 all this media attention, but I feel like there's also 0:00:56.040 --> 0:00:58.800 a lot of pushback at the same time because things 0:00:58.840 --> 0:01:01.960 are different to the way they were in March twenty twenty, 0:01:02.040 --> 0:01:04.800 when no one was expecting that the kind of interest 0:01:04.880 --> 0:01:06.200 rate volatility that we saw. 0:01:08.720 --> 0:01:14.880 Yeah, you know, I think that everything always that sort 0:01:14.920 --> 0:01:17.360 of great metastory of financial media is everyone like over 0:01:17.480 --> 0:01:20.160 learns the lessons of the last crisis, and it's like, oh, 0:01:20.240 --> 0:01:22.520 this blew up once, it'll love again. But actually a 0:01:22.520 --> 0:01:30.400 different thing always blows up again. I did a deadlift one, two, three, Jimmy, Okay, 0:01:31.400 --> 0:01:33.720 so many up marches. 0:01:33.880 --> 0:01:36.440 This isn't after school Special, except I've decided I'm going 0:01:36.480 --> 0:01:39.480 to base my entire personality going forward on campaigning for 0:01:39.480 --> 0:01:41.440 a strategic pork reserve in the US. 0:01:41.560 --> 0:01:43.280 Where's the best imposta? 0:01:43.440 --> 0:01:46.039 These are the important question? Is that robots taking over 0:01:46.040 --> 0:01:46.400 the world. 0:01:46.480 --> 0:01:46.640 No. 0:01:46.720 --> 0:01:49.600 I think that like in a couple of years, the 0:01:49.680 --> 0:01:51.880 AI will do a really good job of making the 0:01:51.880 --> 0:01:55.480 odd launch podcast And people say, I don't really need. 0:01:55.400 --> 0:01:57.000 To listen to Joe and Tracy anymore. 0:01:57.240 --> 0:01:59.160 We do have the. 0:02:01.800 --> 0:02:04.400 Well in the meantime, this is lots more. 0:02:04.440 --> 0:02:06.920 A weekly chat about whatever's on our minds. 0:02:08.360 --> 0:02:11.360 Matt Levine, Bloomberg opinion columnist, is here with us. We 0:02:11.400 --> 0:02:14.240 also have Mike McKenzie who I have worked with for 0:02:14.280 --> 0:02:17.000 a very long time at the Financial Times and who 0:02:17.040 --> 0:02:19.760 is now at Bloomberg. Mike, it's so nice to have 0:02:19.840 --> 0:02:20.160 you here. 0:02:20.480 --> 0:02:21.240 Thanks for having me. 0:02:21.480 --> 0:02:23.280 Are you enjoying Bloomberg versus the Ft? 0:02:24.240 --> 0:02:28.600 Yes, I am shortened with a straight face. 0:02:30.160 --> 0:02:32.040 I'm going to make a bunch of edited ed Commons 0:02:32.240 --> 0:02:32.720 bed bugs. 0:02:32.720 --> 0:02:35.080 Then, oh oh, the bed bugs. 0:02:35.200 --> 0:02:37.000 Okay, okay, from the bugs. 0:02:37.480 --> 0:02:39.920 Well, I was also thinking, Joe's not here today, so 0:02:39.960 --> 0:02:42.240 we can really geek out on the bond market, but 0:02:42.240 --> 0:02:43.880 we can also just gossip about Joe. 0:02:44.360 --> 0:02:45.960 The email that I got about this was like, we're 0:02:46.000 --> 0:02:48.320 going to tell you about Joe taking a self driving car, 0:02:48.840 --> 0:02:50.480 but then, of course we're not here, so now you 0:02:50.480 --> 0:02:52.320 can just tell me about Joe's experience taking a self 0:02:52.400 --> 0:02:52.919 driving car. 0:02:53.160 --> 0:02:56.320 Oh yeah, I should say, Joe's not here today. He's 0:02:56.480 --> 0:02:59.040 really really sick, which is why I have two guests 0:02:59.040 --> 0:03:02.240 with me, Matt and Mike. Joe and I were in 0:03:02.320 --> 0:03:04.640 Austin recently and that was really fun. We ate a 0:03:04.639 --> 0:03:07.040 lot of barbecue, a lot of tex mex and yes, 0:03:07.200 --> 0:03:09.720 Joe went in a self driving car for the first time. 0:03:09.880 --> 0:03:12.000 We were all a little bit scared because he left 0:03:12.360 --> 0:03:15.640 late at night from this like line dancing club that 0:03:15.680 --> 0:03:19.639 we were in, and we didn't hear from him until 0:03:19.639 --> 0:03:22.760 about twelve hours later. But apparently he got home safely, 0:03:23.280 --> 0:03:27.880 if somewhat circuitously. Apparently the car took a really long 0:03:28.040 --> 0:03:31.240 route and he was asking people why that was and 0:03:31.280 --> 0:03:33.280 they said, it's because the car tends to take the 0:03:33.360 --> 0:03:36.040 roads that it's most familiar with are the ones that 0:03:36.080 --> 0:03:39.520 are like less risk, and it ends up taking a while, 0:03:39.640 --> 0:03:41.440 but seems to have been a good experience. 0:03:42.400 --> 0:03:45.120 It's like really capturing the human experience of being a 0:03:45.160 --> 0:03:45.800 student driver. 0:03:45.960 --> 0:03:50.160 Right, I'm not going to go on the highway. I'm 0:03:50.160 --> 0:03:51.440 just going to take the back roads. 0:03:51.680 --> 0:03:53.320 How was Joe's line dancing? I feel like. 0:03:55.840 --> 0:03:58.440 I did not see him line dance that night. I'll 0:03:58.480 --> 0:03:58.960 just pay that. 0:04:00.360 --> 0:04:00.600 Is this? 0:04:01.520 --> 0:04:01.960 Yeah? 0:04:02.200 --> 0:04:05.280 Fair enough? Mike. Have you been in a self driving car? 0:04:06.080 --> 0:04:06.240 No? 0:04:06.080 --> 0:04:06.760 No, not yet. 0:04:06.840 --> 0:04:10.880 Do you want to, Well, there's somebody who takes four 0:04:10.960 --> 0:04:12.720 hours to drive to the morning on a Friday night 0:04:12.760 --> 0:04:15.320 to go skiing on the weekends and winter. Being able 0:04:15.320 --> 0:04:17.120 to sit in a self driving car for four hours 0:04:17.160 --> 0:04:18.880 and get an apple'll do something else will be great. 0:04:19.800 --> 0:04:20.720 Matt. Do you want to? 0:04:21.400 --> 0:04:24.880 Oh? Yeah, I'm like like a sort of disgruntle of 0:04:24.920 --> 0:04:29.760 the recent transplant suburban night and like really really don't 0:04:29.920 --> 0:04:32.719 like driving all the time. Like it's really like really 0:04:32.760 --> 0:04:34.440 diminishes my quality of life to like you have to 0:04:34.520 --> 0:04:37.000 drive everywhere, and if like a robot was driving me, 0:04:37.040 --> 0:04:38.360 it would make it slightly. 0:04:38.000 --> 0:04:40.200 Better drive into the office every day. 0:04:40.400 --> 0:04:42.279 Oh no, no, no, okay, but I bet I drive 0:04:42.320 --> 0:04:43.279 to the transition right. 0:04:43.360 --> 0:04:46.760 Okay, Actually this reminds me. I wanted to ask, like, 0:04:46.839 --> 0:04:49.960 what is your workday like nowadays? Because everyone knows you 0:04:50.000 --> 0:04:53.359 write the newsletter, how early do you get up to 0:04:53.440 --> 0:04:53.840 do that? 0:04:55.640 --> 0:04:58.800 It depends, like you know, I used to say four thirty, 0:04:58.839 --> 0:05:01.160 but then I got kind of laziest. It's like now 0:05:01.200 --> 0:05:04.719 it's like I am doing more of the newsletter during 0:05:04.800 --> 0:05:08.480 like regular working hours, and as a result, it comes 0:05:08.480 --> 0:05:11.200 out at like two thirty instead of like noon. Yeah, 0:05:11.240 --> 0:05:12.760 which is embarrassing, but here we are. 0:05:12.839 --> 0:05:15.600 I think that's okay. I think I think people can 0:05:15.640 --> 0:05:17.160 wait two hours for the newsletter. 0:05:17.920 --> 0:05:21.240 Yeah, there's something to be said for like hitting people 0:05:21.320 --> 0:05:24.080 during their lunch break, But it is driven by my 0:05:24.160 --> 0:05:27.479 ability rather than anything, rather than any conscious plans. So 0:05:27.760 --> 0:05:29.080 it comes out when it comes out. 0:05:29.320 --> 0:05:31.560 Okay, And how do you decide what to write about? 0:05:31.640 --> 0:05:35.560 So we were talking earlier that you were talking about 0:05:35.600 --> 0:05:38.719 the basis trade, but you write about all sorts of things. 0:05:39.080 --> 0:05:40.800 Yeah. I try to write it out things that I 0:05:40.839 --> 0:05:42.680 find interesting and that I feel like I can say 0:05:42.720 --> 0:05:45.640 something funny about or fun like, you know, I try 0:05:45.640 --> 0:05:48.320 to have some sort of balance of topics. I try 0:05:48.440 --> 0:05:51.280 to write about crypto too much. But mostly I just, 0:05:51.360 --> 0:05:53.240 you know, like I try to say, write about things 0:05:53.240 --> 0:05:55.200 where I can say something, and I try to avoid 0:05:55.240 --> 0:05:57.039 like big issues where I'm just like, eh, you know, 0:05:58.200 --> 0:05:59.800 I just would say what everyone else says. 0:06:00.320 --> 0:06:02.120 Mike, how do you decide what to write about? I 0:06:02.120 --> 0:06:04.359 know you have a beat, but there's a lot going 0:06:04.400 --> 0:06:06.560 on on the bond beat at the moment. 0:06:06.400 --> 0:06:08.800 Exactly, and actually ever since I came to Bloomberg in 0:06:08.880 --> 0:06:11.200 late twenty one, and the bomb market's been really the 0:06:11.240 --> 0:06:14.320 big stories. So you come in every day and something's happening. 0:06:14.360 --> 0:06:17.159 And I mean, this week, for example, was great. Everyone 0:06:17.200 --> 0:06:19.279 was coming in and thinking, Okay, the bomb market's going 0:06:19.320 --> 0:06:21.080 to settle down. We've got quarter in a month and 0:06:21.279 --> 0:06:24.000 coming up, so we should see buyers. And right out 0:06:24.040 --> 0:06:26.719 the gate on Monday morning, big block drays in futures. 0:06:26.760 --> 0:06:30.200 People are hedging for higher rates and it just hasn't stopped. 0:06:30.360 --> 0:06:32.600 So it gives you plenty to write about. And we've 0:06:32.640 --> 0:06:35.200 seen some really big interesting moves this week and things 0:06:35.240 --> 0:06:37.840 like geeky things like term premium for examples. The biggest 0:06:37.880 --> 0:06:41.040 rise it's actually outpaced the rise we saw in May 0:06:41.080 --> 0:06:43.440 of twenty thirteen when the tape a turntrum kicked off. 0:06:43.680 --> 0:06:45.120 That's just how big a week it's been. 0:06:45.320 --> 0:06:56.599 That's crazy. Used to be a broker as well, swapsbroker 0:06:56.600 --> 0:06:57.359 back in the nineties. 0:06:57.440 --> 0:07:01.159 I was around. I remember doing swaps Tokyo in ninety 0:07:01.160 --> 0:07:05.440 eight when LTCM blew up and Salomon Smith Barney had 0:07:05.440 --> 0:07:08.360 to come in and unwined it's yen carry trade and 0:07:08.440 --> 0:07:11.880 it just it was ridiculous. They basically filled every other 0:07:12.000 --> 0:07:16.440 bank on the street in a matter of hours with trades. Wow, 0:07:16.480 --> 0:07:19.360 and they kept going and going. So it just told 0:07:19.360 --> 0:07:20.920 you how big it was. And I think the yen 0:07:21.400 --> 0:07:24.640 we had a ticker above us showing the spot yen 0:07:25.320 --> 0:07:27.320 versus the dollar and it went from I think what 0:07:27.400 --> 0:07:30.760 one thirty five down one ten. It was just incredible 0:07:30.760 --> 0:07:32.440 to see that, and that was really the first time 0:07:33.440 --> 0:07:37.720 in my experience at financial markets, we're just so huge. 0:07:38.520 --> 0:07:40.200 I feel like that must have been a really interesting 0:07:40.240 --> 0:07:43.720 time being like a broker in the nineteen nineties in Tokyo. 0:07:44.840 --> 0:07:47.880 It definitely was. I also worked the night shift, so 0:07:47.880 --> 0:07:49.760 I'd come in at two o'clock in the afternoon and 0:07:49.760 --> 0:07:50.600 work through to midnight. 0:07:50.680 --> 0:07:52.920 Wow. And they go to a punky after. 0:07:53.600 --> 0:07:56.200 Yes, because I'd meet up with all the other expat 0:07:56.240 --> 0:07:58.520 brokers who are working for rivals and go and have 0:07:58.520 --> 0:08:00.600 a beer at my Gumbo's and talk about who was 0:08:00.600 --> 0:08:00.960 doing what. 0:08:01.480 --> 0:08:03.160 Oh my gosh, I remember that place. 0:08:03.240 --> 0:08:04.480 Yeah, I wonder if it's still going. 0:08:12.200 --> 0:08:14.360 So, Mike, have you been writing about the basis trade 0:08:14.360 --> 0:08:14.680 as well? 0:08:15.560 --> 0:08:17.560 Actually does mean something to be covered by my colleagues, 0:08:18.480 --> 0:08:22.080 so I've sort of been an observer. I actually don't 0:08:22.080 --> 0:08:24.960 think it's that big a deal this time around. I 0:08:25.000 --> 0:08:28.080 always find it interesting when regular to start piling on 0:08:28.160 --> 0:08:31.240 and we've got Gary Gensler lining up hedge funds as 0:08:31.280 --> 0:08:33.520 the bad guys. Yet again. It kind of reminds me 0:08:33.559 --> 0:08:35.240 when I met with Tim Guy through New York FED 0:08:35.280 --> 0:08:37.160 in two thousand and seven, and he was obsessed with 0:08:37.200 --> 0:08:38.880 hedge funds being the next who was going to be 0:08:38.880 --> 0:08:42.079 the next LTCM and didn't really think REPO was a problem. 0:08:42.240 --> 0:08:45.600 Oh wow, And I just came away thinking they always 0:08:45.640 --> 0:08:48.960 fight the last war and I just wonder whether they're 0:08:48.960 --> 0:08:51.480 doing the same again. And also I think the basis 0:08:51.520 --> 0:08:53.880 trade this time is somewhat different. I mean, I think 0:08:53.920 --> 0:08:56.240 Goldman and other banks have pointed out that the amount 0:08:56.240 --> 0:08:59.600 of leverage is less than what we saw. And don't 0:08:59.600 --> 0:09:02.360 forget this year in the bomb market, you've had a 0:09:02.360 --> 0:09:07.920 lot of institutional long only bond managers piling into futures. 0:09:07.960 --> 0:09:11.720 They've had a huge position long position. So it's natural 0:09:11.760 --> 0:09:13.800 that the basis trade is going to be big because 0:09:14.360 --> 0:09:17.600 the taking the other side of hedge funds, and given 0:09:17.840 --> 0:09:21.840 this sort of post financial crisis regulation, primary dealers don't 0:09:21.840 --> 0:09:25.319 play that role we used to. So again it's the algos, 0:09:25.559 --> 0:09:30.400 It's likes of Virtue Citadel who are the new market makers, 0:09:30.400 --> 0:09:32.480 plus these hedge funds who are stepping in and again 0:09:32.520 --> 0:09:35.400 they're picking up steam rolls, pennies in front of a steamroller. 0:09:35.960 --> 0:09:38.520 It could go wrong, But I think the real story 0:09:38.520 --> 0:09:41.359 in the barb market now is a lot of investors 0:09:41.400 --> 0:09:45.640 are long bonds and they're underwater, and that I think is, 0:09:45.880 --> 0:09:48.000 and we already saw our first glimpse of it was 0:09:48.040 --> 0:09:52.480 back in March when the regional banks went under. And 0:09:53.120 --> 0:09:56.840 right now, if you own ten year plus treasuries, you're 0:09:56.840 --> 0:09:58.920 looking at a loss of nearly nine percent years to date, 0:10:00.040 --> 0:10:03.120 up to twenty nine percent drop last year. So we're 0:10:03.120 --> 0:10:05.560 looking at three straight years of losses and bonds, which 0:10:05.600 --> 0:10:19.760 is supposed to be risky, low vol instruments. 0:10:21.240 --> 0:10:23.240 I'm always interested, like what the basis trade is, right, 0:10:23.240 --> 0:10:25.000 Like I mean, like I think of the Citadels and 0:10:25.000 --> 0:10:27.360 hedgehones of the world as being, in this respect, in 0:10:27.400 --> 0:10:30.520 the business of manufacturing a product for long only managers. 0:10:30.679 --> 0:10:33.560 Where the product is like people want to buy treasury features, 0:10:33.600 --> 0:10:36.079 and like what there is to manufacture those futures out 0:10:36.120 --> 0:10:39.160 of is bonds, And so somebody does the kind of 0:10:39.240 --> 0:10:43.840 like low margin grunt work of turning bonds into futures, right, 0:10:43.920 --> 0:10:47.000 and that work, you know, is sort of necessarily levered 0:10:47.040 --> 0:10:48.480 because like, you know, why wouldn't it be. 0:10:48.600 --> 0:10:50.680 Wait, I should step back and just give like a 0:10:50.800 --> 0:10:53.520 very quick summary of this trade for people who haven't 0:10:53.559 --> 0:10:56.160 been for people who have a life and haven't been 0:10:56.200 --> 0:10:58.640 following it as intensely as we have. But like the 0:10:58.679 --> 0:11:03.760 trade is basically you buy treasuries and sell the associated 0:11:03.760 --> 0:11:07.160 futures contract and you get to pocket the difference or 0:11:07.200 --> 0:11:11.240 the spread between them, which is usually minuscule. And so 0:11:11.360 --> 0:11:14.199 what tends to happen is the people doing this typically 0:11:14.280 --> 0:11:18.600 hedge funds or high frequency traders, those types, they lever up, 0:11:18.640 --> 0:11:21.640 they borrow a lot of money to amplify that spread. 0:11:22.000 --> 0:11:25.080 And in March twenty twenty, when the treasury market started 0:11:25.280 --> 0:11:30.560 blowing up, that you know, that spread became problematic. A 0:11:30.559 --> 0:11:32.720 lot of people had to unwind the trades, and then 0:11:32.720 --> 0:11:35.960 you had this sort of self reinforcing loop where people 0:11:36.000 --> 0:11:39.800 were dumping treasuries and that was sort of fueling volatility 0:11:39.840 --> 0:11:42.200 in the wider market, and it just didn't stop until 0:11:42.200 --> 0:11:45.079 the FED kind of stepped in. So that was that 0:11:45.160 --> 0:11:48.200 was the major concern that this could somehow happen again. 0:11:48.240 --> 0:11:50.920 But Matt, as you point out, yeah, I mean there's 0:11:50.960 --> 0:11:52.280 a reason that exists. 0:11:52.320 --> 0:11:55.560 Yeah, that's like okay, like why is there like why 0:11:55.600 --> 0:11:57.959 like why does someone get long you know, nine hundred 0:11:57.960 --> 0:12:00.000 billion dollars of treasures and short nine hundred million dollar 0:12:00.040 --> 0:12:02.720 to like what is that thing? Like what are the 0:12:02.840 --> 0:12:04.880 users on either side? And I think the answer is, 0:12:05.040 --> 0:12:07.360 you know, as Mike said, like long only bond managers 0:12:07.679 --> 0:12:11.080 are getting along a lot of duration by futures, which 0:12:11.120 --> 0:12:13.000 I think is a little I don't know, it's like 0:12:13.000 --> 0:12:14.600 a little curious to me, which is why that like 0:12:15.280 --> 0:12:19.280 sociologically exists. But I guess it's like, you know, basically, 0:12:19.320 --> 0:12:22.439 it's a sort of like efficient way to get a 0:12:22.480 --> 0:12:26.000 lot of treasury. And so you know, to get that 0:12:26.040 --> 0:12:29.199 efficiency if you're a pension manager or whatever, like someone's right, 0:12:29.240 --> 0:12:32.520 like you're synthetically borrowing money to buy treasuries, and like 0:12:32.640 --> 0:12:35.160 to get that someone is actually borrowing money to buy treasuries, 0:12:35.160 --> 0:12:36.400 and that's someone is a hedge fund. 0:12:36.559 --> 0:12:39.440 Yeah, I mean we mentioned earlier, but like Josh Younger 0:12:39.480 --> 0:12:42.480 has made this point many times that treasuries exist in 0:12:42.520 --> 0:12:45.320 the financial system, but they exist in many different forms 0:12:45.400 --> 0:12:48.120 and someone has to kind of take on that business 0:12:48.240 --> 0:12:52.400 of transformation. In this case, you offer up duration through 0:12:52.840 --> 0:12:56.280 futures contracts, and it's the hedge funds doing it. But 0:12:56.520 --> 0:12:59.360 if it wasn't the hedge funds, then the you know, 0:12:59.400 --> 0:13:01.840 the big asset managers would have a harder time doing it, 0:13:02.000 --> 0:13:04.320 or potentially someone else could step in and try to 0:13:04.360 --> 0:13:06.680 provide that service and arbitrage the difference. 0:13:06.920 --> 0:13:09.160 Yeah. I mean another thing that Josh Hunger and left 0:13:09.200 --> 0:13:11.920 Manon point out on their paper that something that Mike said, 0:13:11.960 --> 0:13:14.840 which is that this used to be you know, the 0:13:14.840 --> 0:13:19.080 business of like intermeding treasuries. Intermediating treasuries used to be 0:13:19.120 --> 0:13:22.080 the business of primary dealers, and like post two thousand 0:13:22.120 --> 0:13:25.800 and seven, capital and other regulations have made the primary 0:13:25.840 --> 0:13:28.480 dealers step back, and now it is the headgehuns and 0:13:28.559 --> 0:13:30.880 algorithmic traders of the world who do this. And it's like, 0:13:31.080 --> 0:13:33.640 you know, if you're worried about the basis trade right now, 0:13:33.679 --> 0:13:37.080 like you're partly worried about like unintended consequences of like 0:13:37.120 --> 0:13:41.280 tightening regulation treasury market, so that the treasury market migrates 0:13:41.320 --> 0:13:44.800 the like less regulated pockets of the world right well. 0:13:45.080 --> 0:13:47.360 And the other thing I think Goldman pointed the stat 0:13:47.480 --> 0:13:49.640 Was it Goldman or JP Morgan? I can't remember, but 0:13:49.880 --> 0:13:54.520 like to Mike's point earlier, when when the basis trade 0:13:54.520 --> 0:13:56.800 blew up in twenty twenty, it was after a period 0:13:56.800 --> 0:14:00.520 of relative stability in the bond market. No one was 0:14:00.559 --> 0:14:03.240 expecting that suddenly you would have all these initial margin 0:14:03.800 --> 0:14:07.880 extra margin requests. But now we've had two years of 0:14:08.120 --> 0:14:11.760 intense spawn market volatility, so it seems really unlikely that 0:14:11.800 --> 0:14:15.720 people are going to be completely surprised if something, you know, 0:14:15.760 --> 0:14:17.520 if there was a big move in the market. I 0:14:17.520 --> 0:14:20.040 could be wrong, but that does seem like it's a 0:14:20.080 --> 0:14:21.080 little bit of a cushion. 0:14:21.320 --> 0:14:22.400 I think it's a good point. 0:14:22.960 --> 0:14:24.400 Yeah, I agree with that, But I also think that 0:14:24.440 --> 0:14:27.640 like the notion that like this is a market that 0:14:27.720 --> 0:14:30.520 is ultimately backstops by someone, and that someone is basically 0:14:30.520 --> 0:14:32.280 the fad. Like, I think there's like truth to that. 0:14:32.360 --> 0:14:34.000 I think if you sort of like trace down like 0:14:34.360 --> 0:14:37.440 what happens if like people are taken by surprise and 0:14:37.520 --> 0:14:41.120 like you know, initial margin requirements do get a lot heavier, 0:14:41.200 --> 0:14:44.120 like like yeah, like the ultimate you know, sort of 0:14:44.160 --> 0:14:46.240 supporter of the treasury market is the FED, and like 0:14:46.320 --> 0:14:49.960 that's a legitimate thing to worry about, but it's also 0:14:50.040 --> 0:14:53.360 sort of like the like like like I think of 0:14:53.400 --> 0:14:55.280 like the treasury market as being a sort of like 0:14:55.640 --> 0:14:58.640 parallel to the banking system, where like it is again 0:14:58.800 --> 0:15:01.440 like a sort of way of you know, just as 0:15:01.480 --> 0:15:03.560 the banking system is like a way to turn like 0:15:03.600 --> 0:15:06.240 people's short term cash, like deposits into like long term 0:15:06.280 --> 0:15:08.960 mortgages and loans. The treasury system is kind of a 0:15:09.000 --> 0:15:11.200 way to turn short term cash deposits in the form 0:15:11.240 --> 0:15:14.160 of prepo into like long term loans to the government, right, right, 0:15:14.160 --> 0:15:18.120 And like that is just like inherently a fragile situation. Right, 0:15:18.160 --> 0:15:21.600 It's inherently fragile for people in the repoul market to 0:15:21.720 --> 0:15:23.480 expect to be able to get their money back overnight, 0:15:23.800 --> 0:15:25.600 and like that money is being used to loan money 0:15:25.640 --> 0:15:28.880 to the government for thirty years, and like that inherent fragility. 0:15:28.960 --> 0:15:30.600 You deal with it in the same way you do 0:15:30.640 --> 0:15:32.920 in the banking system with like equity requirements with like repubm, 0:15:33.040 --> 0:15:36.280 you know, haircuts and and like you know future's margin. 0:15:36.640 --> 0:15:40.920 But like that is ninety nine point whatever percent reliable, 0:15:41.160 --> 0:15:43.800 and you understand that there is a fail state, and 0:15:43.840 --> 0:15:46.480 the fail state is like there's some lender last resort 0:15:46.720 --> 0:15:48.960 that steps in to the market if the market collapses. 0:15:49.160 --> 0:15:51.600 And I just think that, like people don't like to 0:15:51.640 --> 0:15:54.120 hear that, you know, PEO. People don't like to think 0:15:54.120 --> 0:15:56.320 about the idea that there's like not one hundred percent 0:15:56.360 --> 0:15:59.040 reliability but ninety nine point whatever percent reliability. That's just 0:15:59.080 --> 0:16:01.000 like sort of that's like, how you get this sort 0:16:01.000 --> 0:16:03.840 of financial intermediation is you take a certain amount of 0:16:03.880 --> 0:16:04.840 that kind of run risk. 0:16:05.840 --> 0:16:09.000 Yeah, And I think another really interesting aspect to this 0:16:09.120 --> 0:16:12.240 market since the FED began titling policies, that we did 0:16:12.280 --> 0:16:15.400 see a search volatility, a lot of stress and liquidity 0:16:15.440 --> 0:16:17.760 measures last year. But if you talk to investors, they've 0:16:17.760 --> 0:16:20.800 told you I can still buy and sell treasures. And 0:16:20.840 --> 0:16:24.200 I think given the fact the FED did a number 0:16:24.200 --> 0:16:26.720 of jumbo rate hikes last year for the first time 0:16:26.800 --> 0:16:29.000 since ninety four, when they only did one seventy five 0:16:29.040 --> 0:16:31.840 basis point hike back then, and that was always seen 0:16:31.840 --> 0:16:34.840 as the worst ever bond bear market. Well, obviously last 0:16:34.920 --> 0:16:39.360 year was the worst ever bond market for investors. But 0:16:39.440 --> 0:16:42.080 it's remarkable to me that the basis trade hasn't blown up. 0:16:42.240 --> 0:16:44.840 It's actually kept functioning. And I think when you step 0:16:44.920 --> 0:16:46.840 back and look, if he said to someone, hey, the 0:16:46.920 --> 0:16:50.000 Fed's going to jack rates over five hundred basis points, 0:16:50.240 --> 0:16:53.680 They're going to throw in seventy five basis point rate 0:16:53.720 --> 0:16:57.400 hike shots, and things are going to be fairly orderly. 0:16:57.640 --> 0:16:59.400 In fact, when I was talking to investors last year, 0:16:59.440 --> 0:17:02.800 said how bad is it more than Quite a few 0:17:02.800 --> 0:17:05.320 of them said, well, actually, it's actually fun because it 0:17:05.400 --> 0:17:07.600 was so boring for the last ten years when rates 0:17:07.720 --> 0:17:10.520 was slumbering around zero. He said, you're coming in every 0:17:10.600 --> 0:17:13.000 day and you're talking about where rates are going to go. 0:17:13.240 --> 0:17:15.920 I used to write stories about how boring bonds were, 0:17:16.000 --> 0:17:18.040 and all the traders were complaining about it. 0:17:18.080 --> 0:17:18.840 There wasn't enough vault. 0:17:19.040 --> 0:17:20.000 It's not boring anymore. 0:17:20.160 --> 0:17:22.720 But I think it's amazing to me looking at this 0:17:22.840 --> 0:17:24.280 how the market has really held in. 0:17:24.400 --> 0:17:24.560 Now. 0:17:25.080 --> 0:17:27.760 I look at the credit markets and think they might 0:17:27.760 --> 0:17:30.359 be whistling past the graveyard here because spreads are still 0:17:30.359 --> 0:17:32.960 sayed in pretty tight. This has been predominantly a rate shock, 0:17:34.320 --> 0:17:37.600 but it's also occurring when the Treasury is going to 0:17:37.600 --> 0:17:40.359 be selling a lot more treasuries and that if you 0:17:40.440 --> 0:17:43.080 want to know what was the trigger for the recent 0:17:43.240 --> 0:17:45.880 rise in the lee yields, it really began in late 0:17:45.960 --> 0:17:48.760 July when the refunding was coming and that was a 0:17:48.840 --> 0:17:52.680 definite shock, and really the market just hasn't stopped selling 0:17:52.760 --> 0:17:53.440 off since then. 0:17:53.760 --> 0:17:55.639 Yeah. I think this is important because a lot of 0:17:55.680 --> 0:17:59.960 this is being interpreted as a rate shock post the FOMC. 0:18:00.280 --> 0:18:03.600 The recent FOMC meeting the sort of higher for longer narrative, 0:18:03.640 --> 0:18:06.359 but it seems like it's more of a supply demand issue. 0:18:06.560 --> 0:18:08.679 It's really interesting because normally when you ask people that 0:18:08.760 --> 0:18:11.679 question how important is supply, they just shrug the shoulders 0:18:11.680 --> 0:18:14.080 and go, oh, it's only something at the margin. But 0:18:14.160 --> 0:18:18.120 this is what it kicked this off. And now last 0:18:18.119 --> 0:18:20.880 week's FED meeting I think really did nail this because 0:18:21.200 --> 0:18:23.280 once the Fed said higher for longer, it does seem 0:18:23.280 --> 0:18:27.160 to be finally registering with bond markets that the Fed 0:18:27.240 --> 0:18:30.719 is definitely serious about this. And this week's pick up 0:18:30.720 --> 0:18:32.800 in oil prices has only added to that sort of 0:18:32.840 --> 0:18:35.239 anxiety that, well, if inflation isn't really going to come 0:18:35.280 --> 0:18:40.280 back to two percent, where just how much can the 0:18:40.320 --> 0:18:45.840 Fed conceivably cut rates from here? So I think there's 0:18:45.880 --> 0:18:48.680 a lot of anxiety now. And the realization is that 0:18:48.720 --> 0:18:51.679 when you combine supply with a FED that is on 0:18:52.080 --> 0:18:57.560 perma hold at higher levels, that's the treasury curve is 0:18:57.600 --> 0:19:00.240 still below the funds rate. That's not a good look. 0:19:00.240 --> 0:19:02.920 If you think back to two thousand and seven, eventually 0:19:02.960 --> 0:19:05.359 that tenure you'd get to five twenty five, bang in 0:19:05.400 --> 0:19:07.800