Speaker 1: I want to talk about the Basis Trade. I have
Speaker 1: a song from Basis Basis Trade, Basis Trade. I want
Speaker 1: to talk about the Basis Trade. Let's do that. Matt,
Speaker 1: you've been writing about this.
Speaker 2: I have you have to. I feel like you've been
Speaker 2: writing that for years.
Speaker 1: Well, so can I just say I commissioned the first
Speaker 1: story about the Basis trade when it blew up in
Speaker 1: March twenty twenty, and Steven Spratt actually wrote it, but
Speaker 1: I like helped him with it and gave him a
Speaker 1: bunch of stuff from Josh Younger at JP Morgan at
Speaker 1: the time. Actually, I kind of regret not putting my
Speaker 1: name on that story because of course it became this
Speaker 1: huge thing that everyone's talking about.
Speaker 2: Yeah, everything I know about the Basis trade I got
Speaker 2: from Josh Younger.
Speaker 1: Yeahes not really trade it like, no.
Speaker 2: It's a sort of like philosopher of treasury markets. I
Speaker 2: feel like he he like his philosophy of treasury markets
Speaker 2: has really influenced how I think about the Basis trade.
Speaker 1: So everyone seems up in arms about it, and there's
Speaker 1: all this media attention, but I feel like there's also
Speaker 1: a lot of pushback at the same time because things
Speaker 1: are different to the way they were in March twenty twenty,
Speaker 1: when no one was expecting that the kind of interest
Speaker 1: rate volatility that we saw.
Speaker 2: Yeah, you know, I think that everything always that sort
Speaker 2: of great metastory of financial media is everyone like over
Speaker 2: learns the lessons of the last crisis, and it's like, oh,
Speaker 2: this blew up once, it'll love again. But actually a
Speaker 2: different thing always blows up again. I did a deadlift one, two, three, Jimmy, Okay,
Speaker 2: so many up marches.
Speaker 1: This isn't after school Special, except I've decided I'm going
Speaker 1: to base my entire personality going forward on campaigning for
Speaker 1: a strategic pork reserve in the US.
Speaker 2: Where's the best imposta?
Speaker 1: These are the important question? Is that robots taking over
Speaker 1: the world.
Speaker 3: No.
Speaker 2: I think that like in a couple of years, the
Speaker 2: AI will do a really good job of making the
Speaker 2: odd launch podcast And people say, I don't really need.
Speaker 1: To listen to Joe and Tracy anymore.
Speaker 2: We do have the.
Speaker 1: Well in the meantime, this is lots more.
Speaker 3: A weekly chat about whatever's on our minds.
Speaker 1: Matt Levine, Bloomberg opinion columnist, is here with us. We
Speaker 1: also have Mike McKenzie who I have worked with for
Speaker 1: a very long time at the Financial Times and who
Speaker 1: is now at Bloomberg. Mike, it's so nice to have
Speaker 1: you here.
Speaker 3: Thanks for having me.
Speaker 1: Are you enjoying Bloomberg versus the Ft?
Speaker 3: Yes, I am shortened with a straight face.
Speaker 2: I'm going to make a bunch of edited ed Commons
Speaker 2: bed bugs.
Speaker 1: Then, oh oh, the bed bugs.
Speaker 3: Okay, okay, from the bugs.
Speaker 1: Well, I was also thinking, Joe's not here today, so
Speaker 1: we can really geek out on the bond market, but
Speaker 1: we can also just gossip about Joe.
Speaker 2: The email that I got about this was like, we're
Speaker 2: going to tell you about Joe taking a self driving car,
Speaker 2: but then, of course we're not here, so now you
Speaker 2: can just tell me about Joe's experience taking a self
Speaker 2: driving car.
Speaker 1: Oh yeah, I should say, Joe's not here today. He's
Speaker 1: really really sick, which is why I have two guests
Speaker 1: with me, Matt and Mike. Joe and I were in
Speaker 1: Austin recently and that was really fun. We ate a
Speaker 1: lot of barbecue, a lot of tex mex and yes,
Speaker 1: Joe went in a self driving car for the first time.
Speaker 1: We were all a little bit scared because he left
Speaker 1: late at night from this like line dancing club that
Speaker 1: we were in, and we didn't hear from him until
Speaker 1: about twelve hours later. But apparently he got home safely,
Speaker 1: if somewhat circuitously. Apparently the car took a really long
Speaker 1: route and he was asking people why that was and
Speaker 1: they said, it's because the car tends to take the
Speaker 1: roads that it's most familiar with are the ones that
Speaker 1: are like less risk, and it ends up taking a while,
Speaker 1: but seems to have been a good experience.
Speaker 2: It's like really capturing the human experience of being a
Speaker 2: student driver.
Speaker 1: Right, I'm not going to go on the highway. I'm
Speaker 1: just going to take the back roads.
Speaker 2: How was Joe's line dancing? I feel like.
Speaker 1: I did not see him line dance that night. I'll
Speaker 1: just pay that.
Speaker 2: Is this?
Speaker 3: Yeah?
Speaker 1: Fair enough? Mike. Have you been in a self driving car?
Speaker 3: No?
Speaker 2: No, not yet.
Speaker 3: Do you want to, Well, there's somebody who takes four
Speaker 3: hours to drive to the morning on a Friday night
Speaker 3: to go skiing on the weekends and winter. Being able
Speaker 3: to sit in a self driving car for four hours
Speaker 3: and get an apple'll do something else will be great.
Speaker 1: Matt. Do you want to?
Speaker 2: Oh? Yeah, I'm like like a sort of disgruntle of
Speaker 2: the recent transplant suburban night and like really really don't
Speaker 2: like driving all the time. Like it's really like really
Speaker 2: diminishes my quality of life to like you have to
Speaker 2: drive everywhere, and if like a robot was driving me,
Speaker 2: it would make it slightly.
Speaker 1: Better drive into the office every day.
Speaker 2: Oh no, no, no, okay, but I bet I drive
Speaker 2: to the transition right.
Speaker 1: Okay, Actually this reminds me. I wanted to ask, like,
Speaker 1: what is your workday like nowadays? Because everyone knows you
Speaker 1: write the newsletter, how early do you get up to
Speaker 1: do that?
Speaker 2: It depends, like you know, I used to say four thirty,
Speaker 2: but then I got kind of laziest. It's like now
Speaker 2: it's like I am doing more of the newsletter during
Speaker 2: like regular working hours, and as a result, it comes
Speaker 2: out at like two thirty instead of like noon. Yeah,
Speaker 2: which is embarrassing, but here we are.
Speaker 1: I think that's okay. I think I think people can
Speaker 1: wait two hours for the newsletter.
Speaker 2: Yeah, there's something to be said for like hitting people
Speaker 2: during their lunch break, But it is driven by my
Speaker 2: ability rather than anything, rather than any conscious plans. So
Speaker 2: it comes out when it comes out.
Speaker 1: Okay, And how do you decide what to write about?
Speaker 1: So we were talking earlier that you were talking about
Speaker 1: the basis trade, but you write about all sorts of things.
Speaker 2: Yeah. I try to write it out things that I
Speaker 2: find interesting and that I feel like I can say
Speaker 2: something funny about or fun like, you know, I try
Speaker 2: to have some sort of balance of topics. I try
Speaker 2: to write about crypto too much. But mostly I just,
Speaker 2: you know, like I try to say, write about things
Speaker 2: where I can say something, and I try to avoid
Speaker 2: like big issues where I'm just like, eh, you know,
Speaker 2: I just would say what everyone else says.
Speaker 1: Mike, how do you decide what to write about? I
Speaker 1: know you have a beat, but there's a lot going
Speaker 1: on on the bond beat at the moment.
Speaker 3: Exactly, and actually ever since I came to Bloomberg in
Speaker 3: late twenty one, and the bomb market's been really the
Speaker 3: big stories. So you come in every day and something's happening.
Speaker 3: And I mean, this week, for example, was great. Everyone
Speaker 3: was coming in and thinking, Okay, the bomb market's going
Speaker 3: to settle down. We've got quarter in a month and
Speaker 3: coming up, so we should see buyers. And right out
Speaker 3: the gate on Monday morning, big block drays in futures.
Speaker 3: People are hedging for higher rates and it just hasn't stopped.
Speaker 3: So it gives you plenty to write about. And we've
Speaker 3: seen some really big interesting moves this week and things
Speaker 3: like geeky things like term premium for examples. The biggest
Speaker 3: rise it's actually outpaced the rise we saw in May
Speaker 3: of twenty thirteen when the tape a turntrum kicked off.
Speaker 3: That's just how big a week it's been.
Speaker 1: That's crazy. Used to be a broker as well, swapsbroker
Speaker 1: back in the nineties.
Speaker 3: I was around. I remember doing swaps Tokyo in ninety
Speaker 3: eight when LTCM blew up and Salomon Smith Barney had
Speaker 3: to come in and unwined it's yen carry trade and
Speaker 3: it just it was ridiculous. They basically filled every other
Speaker 3: bank on the street in a matter of hours with trades. Wow,
Speaker 3: and they kept going and going. So it just told
Speaker 3: you how big it was. And I think the yen
Speaker 3: we had a ticker above us showing the spot yen
Speaker 3: versus the dollar and it went from I think what
Speaker 3: one thirty five down one ten. It was just incredible
Speaker 3: to see that, and that was really the first time
Speaker 3: in my experience at financial markets, we're just so huge.
Speaker 1: I feel like that must have been a really interesting
Speaker 1: time being like a broker in the nineteen nineties in Tokyo.
Speaker 3: It definitely was. I also worked the night shift, so
Speaker 3: I'd come in at two o'clock in the afternoon and
Speaker 3: work through to midnight.
Speaker 1: Wow. And they go to a punky after.
Speaker 3: Yes, because I'd meet up with all the other expat
Speaker 3: brokers who are working for rivals and go and have
Speaker 3: a beer at my Gumbo's and talk about who was
Speaker 3: doing what.
Speaker 1: Oh my gosh, I remember that place.
Speaker 3: Yeah, I wonder if it's still going.
Speaker 1: So, Mike, have you been writing about the basis trade
Speaker 1: as well?
Speaker 3: Actually does mean something to be covered by my colleagues,
Speaker 3: so I've sort of been an observer. I actually don't
Speaker 3: think it's that big a deal this time around. I
Speaker 3: always find it interesting when regular to start piling on
Speaker 3: and we've got Gary Gensler lining up hedge funds as
Speaker 3: the bad guys. Yet again. It kind of reminds me
Speaker 3: when I met with Tim Guy through New York FED
Speaker 3: in two thousand and seven, and he was obsessed with
Speaker 3: hedge funds being the next who was going to be
Speaker 3: the next LTCM and didn't really think REPO was a problem.
Speaker 3: Oh wow, And I just came away thinking they always
Speaker 3: fight the last war and I just wonder whether they're
Speaker 3: doing the same again. And also I think the basis
Speaker 3: trade this time is somewhat different. I mean, I think
Speaker 3: Goldman and other banks have pointed out that the amount
Speaker 3: of leverage is less than what we saw. And don't
Speaker 3: forget this year in the bomb market, you've had a
Speaker 3: lot of institutional long only bond managers piling into futures.
Speaker 3: They've had a huge position long position. So it's natural
Speaker 3: that the basis trade is going to be big because
Speaker 3: the taking the other side of hedge funds, and given
Speaker 3: this sort of post financial crisis regulation, primary dealers don't
Speaker 3: play that role we used to. So again it's the algos,
Speaker 3: It's likes of Virtue Citadel who are the new market makers,
Speaker 3: plus these hedge funds who are stepping in and again
Speaker 3: they're picking up steam rolls, pennies in front of a steamroller.
Speaker 3: It could go wrong, But I think the real story
Speaker 3: in the barb market now is a lot of investors
Speaker 3: are long bonds and they're underwater, and that I think is,
Speaker 3: and we already saw our first glimpse of it was
Speaker 3: back in March when the regional banks went under. And
Speaker 3: right now, if you own ten year plus treasuries, you're
Speaker 3: looking at a loss of nearly nine percent years to date,
Speaker 3: up to twenty nine percent drop last year. So we're
Speaker 3: looking at three straight years of losses and bonds, which
Speaker 3: is supposed to be risky, low vol instruments.
Speaker 2: I'm always interested, like what the basis trade is, right,
Speaker 2: Like I mean, like I think of the Citadels and
Speaker 2: hedgehones of the world as being, in this respect, in
Speaker 2: the business of manufacturing a product for long only managers.
Speaker 2: Where the product is like people want to buy treasury features,
Speaker 2: and like what there is to manufacture those futures out
Speaker 2: of is bonds, And so somebody does the kind of
Speaker 2: like low margin grunt work of turning bonds into futures, right,
Speaker 2: and that work, you know, is sort of necessarily levered
Speaker 2: because like, you know, why wouldn't it be.
Speaker 1: Wait, I should step back and just give like a
Speaker 1: very quick summary of this trade for people who haven't
Speaker 1: been for people who have a life and haven't been
Speaker 1: following it as intensely as we have. But like the
Speaker 1: trade is basically you buy treasuries and sell the associated
Speaker 1: futures contract and you get to pocket the difference or
Speaker 1: the spread between them, which is usually minuscule. And so
Speaker 1: what tends to happen is the people doing this typically
Speaker 1: hedge funds or high frequency traders, those types, they lever up,
Speaker 1: they borrow a lot of money to amplify that spread.
Speaker 1: And in March twenty twenty, when the treasury market started
Speaker 1: blowing up, that you know, that spread became problematic. A
Speaker 1: lot of people had to unwind the trades, and then
Speaker 1: you had this sort of self reinforcing loop where people
Speaker 1: were dumping treasuries and that was sort of fueling volatility
Speaker 1: in the wider market, and it just didn't stop until
Speaker 1: the FED kind of stepped in. So that was that
Speaker 1: was the major concern that this could somehow happen again.
Speaker 1: But Matt, as you point out, yeah, I mean there's
Speaker 1: a reason that exists.
Speaker 2: Yeah, that's like okay, like why is there like why
Speaker 2: like why does someone get long you know, nine hundred
Speaker 2: billion dollars of treasures and short nine hundred million dollar
Speaker 2: to like what is that thing? Like what are the
Speaker 2: users on either side? And I think the answer is,
Speaker 2: you know, as Mike said, like long only bond managers
Speaker 2: are getting along a lot of duration by futures, which
Speaker 2: I think is a little I don't know, it's like
Speaker 2: a little curious to me, which is why that like
Speaker 2: sociologically exists. But I guess it's like, you know, basically,
Speaker 2: it's a sort of like efficient way to get a
Speaker 2: lot of treasury. And so you know, to get that
Speaker 2: efficiency if you're a pension manager or whatever, like someone's right,
Speaker 2: like you're synthetically borrowing money to buy treasuries, and like
Speaker 2: to get that someone is actually borrowing money to buy treasuries,
Speaker 2: and that's someone is a hedge fund.
Speaker 1: Yeah, I mean we mentioned earlier, but like Josh Younger
Speaker 1: has made this point many times that treasuries exist in
Speaker 1: the financial system, but they exist in many different forms
Speaker 1: and someone has to kind of take on that business
Speaker 1: of transformation. In this case, you offer up duration through
Speaker 1: futures contracts, and it's the hedge funds doing it. But
Speaker 1: if it wasn't the hedge funds, then the you know,
Speaker 1: the big asset managers would have a harder time doing it,
Speaker 1: or potentially someone else could step in and try to
Speaker 1: provide that service and arbitrage the difference.
Speaker 2: Yeah. I mean another thing that Josh Hunger and left
Speaker 2: Manon point out on their paper that something that Mike said,
Speaker 2: which is that this used to be you know, the
Speaker 2: business of like intermeding treasuries. Intermediating treasuries used to be
Speaker 2: the business of primary dealers, and like post two thousand
Speaker 2: and seven, capital and other regulations have made the primary
Speaker 2: dealers step back, and now it is the headgehuns and
Speaker 2: algorithmic traders of the world who do this. And it's like,
Speaker 2: you know, if you're worried about the basis trade right now,
Speaker 2: like you're partly worried about like unintended consequences of like
Speaker 2: tightening regulation treasury market, so that the treasury market migrates
Speaker 2: the like less regulated pockets of the world right well.
Speaker 1: And the other thing I think Goldman pointed the stat
Speaker 1: Was it Goldman or JP Morgan? I can't remember, but
Speaker 1: like to Mike's point earlier, when when the basis trade
Speaker 1: blew up in twenty twenty, it was after a period
Speaker 1: of relative stability in the bond market. No one was
Speaker 1: expecting that suddenly you would have all these initial margin
Speaker 1: extra margin requests. But now we've had two years of
Speaker 1: intense spawn market volatility, so it seems really unlikely that
Speaker 1: people are going to be completely surprised if something, you know,
Speaker 1: if there was a big move in the market. I
Speaker 1: could be wrong, but that does seem like it's a
Speaker 1: little bit of a cushion.
Speaker 3: I think it's a good point.
Speaker 2: Yeah, I agree with that, But I also think that
Speaker 2: like the notion that like this is a market that
Speaker 2: is ultimately backstops by someone, and that someone is basically
Speaker 2: the fad. Like, I think there's like truth to that.
Speaker 2: I think if you sort of like trace down like
Speaker 2: what happens if like people are taken by surprise and
Speaker 2: like you know, initial margin requirements do get a lot heavier,
Speaker 2: like like yeah, like the ultimate you know, sort of
Speaker 2: supporter of the treasury market is the FED, and like
Speaker 2: that's a legitimate thing to worry about, but it's also
Speaker 2: sort of like the like like like I think of
Speaker 2: like the treasury market as being a sort of like
Speaker 2: parallel to the banking system, where like it is again
Speaker 2: like a sort of way of you know, just as
Speaker 2: the banking system is like a way to turn like
Speaker 2: people's short term cash, like deposits into like long term
Speaker 2: mortgages and loans. The treasury system is kind of a
Speaker 2: way to turn short term cash deposits in the form
Speaker 2: of prepo into like long term loans to the government, right, right,
Speaker 2: And like that is just like inherently a fragile situation. Right,
Speaker 2: It's inherently fragile for people in the repoul market to
Speaker 2: expect to be able to get their money back overnight,
Speaker 2: and like that money is being used to loan money
Speaker 2: to the government for thirty years, and like that inherent fragility.
Speaker 2: You deal with it in the same way you do
Speaker 2: in the banking system with like equity requirements with like repubm,
Speaker 2: you know, haircuts and and like you know future's margin.
Speaker 2: But like that is ninety nine point whatever percent reliable,
Speaker 2: and you understand that there is a fail state, and
Speaker 2: the fail state is like there's some lender last resort
Speaker 2: that steps in to the market if the market collapses.
Speaker 2: And I just think that, like people don't like to
Speaker 2: hear that, you know, PEO. People don't like to think
Speaker 2: about the idea that there's like not one hundred percent
Speaker 2: reliability but ninety nine point whatever percent reliability. That's just
Speaker 2: like sort of that's like, how you get this sort
Speaker 2: of financial intermediation is you take a certain amount of
Speaker 2: that kind of run risk.
Speaker 3: Yeah, And I think another really interesting aspect to this
Speaker 3: market since the FED began titling policies, that we did
Speaker 3: see a search volatility, a lot of stress and liquidity
Speaker 3: measures last year. But if you talk to investors, they've
Speaker 3: told you I can still buy and sell treasures. And
Speaker 3: I think given the fact the FED did a number
Speaker 3: of jumbo rate hikes last year for the first time
Speaker 3: since ninety four, when they only did one seventy five
Speaker 3: basis point hike back then, and that was always seen
Speaker 3: as the worst ever bond bear market. Well, obviously last
Speaker 3: year was the worst ever bond market for investors. But
Speaker 3: it's remarkable to me that the basis trade hasn't blown up.
Speaker 3: It's actually kept functioning. And I think when you step
Speaker 3: back and look, if he said to someone, hey, the
Speaker 3: Fed's going to jack rates over five hundred basis points,
Speaker 3: They're going to throw in seventy five basis point rate
Speaker 3: hike shots, and things are going to be fairly orderly.
Speaker 3: In fact, when I was talking to investors last year,
Speaker 3: said how bad is it more than Quite a few
Speaker 3: of them said, well, actually, it's actually fun because it
Speaker 3: was so boring for the last ten years when rates
Speaker 3: was slumbering around zero. He said, you're coming in every
Speaker 3: day and you're talking about where rates are going to go.
Speaker 1: I used to write stories about how boring bonds were,
Speaker 1: and all the traders were complaining about it.
Speaker 3: There wasn't enough vault.
Speaker 1: It's not boring anymore.
Speaker 3: But I think it's amazing to me looking at this
Speaker 3: how the market has really held in.
Speaker 2: Now.
Speaker 3: I look at the credit markets and think they might
Speaker 3: be whistling past the graveyard here because spreads are still
Speaker 3: sayed in pretty tight. This has been predominantly a rate shock,
Speaker 3: but it's also occurring when the Treasury is going to
Speaker 3: be selling a lot more treasuries and that if you
Speaker 3: want to know what was the trigger for the recent
Speaker 3: rise in the lee yields, it really began in late
Speaker 3: July when the refunding was coming and that was a
Speaker 3: definite shock, and really the market just hasn't stopped selling
Speaker 3: off since then.
Speaker 1: Yeah. I think this is important because a lot of
Speaker 1: this is being interpreted as a rate shock post the FOMC.
Speaker 1: The recent FOMC meeting the sort of higher for longer narrative,
Speaker 1: but it seems like it's more of a supply demand issue.
Speaker 3: It's really interesting because normally when you ask people that
Speaker 3: question how important is supply, they just shrug the shoulders
Speaker 3: and go, oh, it's only something at the margin. But
Speaker 3: this is what it kicked this off. And now last
Speaker 3: week's FED meeting I think really did nail this because
Speaker 3: once the Fed said higher for longer, it does seem
Speaker 3: to be finally registering with bond markets that the Fed
Speaker 3: is definitely serious about this. And this week's pick up
Speaker 3: in oil prices has only added to that sort of
Speaker 3: anxiety that, well, if inflation isn't really going to come
Speaker 3: back to two percent, where just how much can the
Speaker 3: Fed conceivably cut rates from here? So I think there's
Speaker 3: a lot of anxiety now. And the realization is that
Speaker 3: when you combine supply with a FED that is on
Speaker 3: perma hold at higher levels, that's the treasury curve is
Speaker 3: still below the funds rate. That's not a good look.
Speaker 3: If you think back to two thousand and seven, eventually
Speaker 3: that tenure you'd get to five twenty five, bang in
Speaker 3: line with it. Then FED funds rate of five on
Speaker 3: a quarter.
Speaker 2: Things really interesting what you said about you can still
Speaker 2: buy and sell treasuries, because I think that there was
Speaker 2: in addition to the narrative of it being boring, I
Speaker 2: think there was a real narrative in rates, but also
Speaker 2: in credit and kind of everywhere that as like banks
Speaker 2: retreated from providing balance sheet and like you know, intermediation
Speaker 2: was being done by like high frequency traders who have
Speaker 2: no balance sheet, that the market wouldn't work anymore, and
Speaker 2: that it was like, it's fine now that the market
Speaker 2: is boring and rates never moved, but if rates go up,
Speaker 2: like these hyper council traders won't be there to provide liquidity,
Speaker 2: and like everything will break down. And you're right, that
Speaker 2: just didn't happen at all. And it turns out that
Speaker 2: like the modern sort of system of treasure, intermediation can
Speaker 2: work even in a volatle rates environment.
Speaker 1: People are worried about on market.
Speaker 2: Like I really were.
Speaker 1: I have a confession, Matt. I used to write about
Speaker 1: this a lot and your your section, your title annoyed me. Well,
Speaker 1: it was meant to legitimate concerns at the time.
Speaker 2: It was.
Speaker 1: Although I will say I think a lot of people
Speaker 1: I think a lot of people used liquidity as a
Speaker 1: synonym for price.
Speaker 2: So I completely agree with that.
Speaker 1: I'm angry about the price I have to trade these at,
Speaker 1: not really that I can't trade them at all.
Speaker 2: Right, Like, there's like a thing where it's like liquid
Speaker 2: like bad liquidity means like bad like wide bit ass spreads.
Speaker 2: There's another thing where bad liquidity means like the price
Speaker 2: has gone down, right, like you know, and that's like
Speaker 2: your thing. You say, right, that's not that's not a
Speaker 2: real liquidity thing. But but yeah, no, I was. People
Speaker 2: were very worried about bound luck at liquidity, and I
Speaker 2: enjoyed making fun of them. And I feel like, you know,
Speaker 2: there's like there's like ups and downs, but more or
Speaker 2: less I feel vindicated making in front of them for
Speaker 2: like ten years or whatever.
Speaker 1: Well now wait a second, wait, I mean, it's not
Speaker 1: like this was a complete non ish. Yeah, thank you,
Speaker 1: thank you Matt for rescuing that. It's not like this
Speaker 1: was a complete non issue though, because in March twenty twenty,
Speaker 1: again we saw treasury sees up in one way or another.
Speaker 1: We saw the FED announce a corporate bond buying program
Speaker 1: that it's never done before. In the end, it didn't
Speaker 1: actually have to buy that many bonds. The announcement was
Speaker 1: enough to kind of, you know, calm the market. But
Speaker 1: that was I mean, that was the worst case scenario.
Speaker 3: You know.
Speaker 1: In twenty fifteen, when we were talking about a credit
Speaker 1: market blow up, the end game was always, oh well
Speaker 1: maybe one day the FED will have to buy corporate bonds.
Speaker 2: Okay, that's fair, that's fair.
Speaker 3: Well it wasn't on the getting droid though. Everyone, Yeah,
Speaker 3: your treasures to get cash. It became a cash well
Speaker 3: he needed to have cash. So when they started selling
Speaker 3: treasures for that reason, getting back to Matt's earlier point,
Speaker 3: that's when the Fed does step in.
Speaker 2: Yeah, that didn't feel like, you know, the market functioning
Speaker 2: that people had set up just it didn't work. You know.
Speaker 2: It felt more like, you know, there was an hour
Speaker 2: get in trade.
Speaker 1: But yeah, I hear you fair enough, but we need
Speaker 1: another credit blow up to test this thesis and we
Speaker 1: might get one. Well okay, wait, yeah that's true.
Speaker 2: I mean that's a real point, right, I mean, like
Speaker 2: you know, as I said, like rates have got that
Speaker 2: and credit really hasn't. And like one there's a wave
Speaker 2: of bankruptcies or whatever, like you know, well how will
Speaker 2: that market function.
Speaker 1: So, Mike, you brought up SVP earlier, and I've seen
Speaker 1: at least two research notes this week, one from TD
Speaker 1: and I think one from Victor Schwetz over at maccrory
Speaker 1: talking about the notion that maybe this is the point
Speaker 1: at which we start to see another thing break.
Speaker 2: Yeah.
Speaker 3: I'm beginning to hear a bit more talk in that
Speaker 3: direction from a few people I speak with regularly. I mean,
Speaker 3: I think the Fed did surprise the bar market by
Speaker 3: ring fencing the sovereign bank. It's not not the original
Speaker 3: bank problems, So I think that's one potential wild card.
Speaker 3: As we get into the fourth quarter and set a
Speaker 3: time when markets are already down for the year, which
Speaker 3: is the case for treasuries, You're going to have some
Speaker 3: investors going for a Hall Mary and probably trying to
Speaker 3: short get on the momentum. Others are going to have
Speaker 3: to start keep cutting back. So I think Q four
Speaker 3: could be a really interesting time for all kinds of reasons,
Speaker 3: but particularly given the way it's setting up. So you've
Speaker 3: got to keep an eye on the regional bank problems.
Speaker 3: As for credit, I actually think credit markets are completely
Speaker 3: different to what we've seen before. I think the rise
Speaker 3: of private equity and own their own internal private credit
Speaker 3: funds has changed the game here. I'm not so sure
Speaker 3: that you get the kind of credit blow up everyone's
Speaker 3: looking for it. I mean, Howard Marks, they're all looking
Speaker 3: for this because they all want to come in and
Speaker 3: buy really you know, bonds at big discounts like we
Speaker 3: saw particularly the jump bomb market at the end of
Speaker 3: two thousand and eight, And in fact, the money that
Speaker 3: was made by hedgehoons you jumped onto that trade like
Speaker 3: Blue Mountain for example, in earlier nine was just enormous.
Speaker 3: So I think private equities they've got to stockpile of
Speaker 3: dry powder. They're now in the credit game. I think
Speaker 3: that the toon was passed when Blackstone's credit fund took
Speaker 3: a part Goldman Sachs on a on a credit through
Speaker 3: his trade circ at twenty sixteen, twenty seventeen. I think
Speaker 3: and that they're they're the they're the guys who have
Speaker 3: all the information now, they have the kind of the edge,
Speaker 3: they know these companies, they know what's going on. So
Speaker 3: I'm just not sure you're going to get the kind
Speaker 3: of credit blow up people are anticipating. And I think
Speaker 3: it's a function that, you know, private equity is now
Speaker 3: the big player and credit.
Speaker 1: Yeah, and they don't have to mark to market as much.
Speaker 3: Well that's the illusion of liquidity.
Speaker 1: Yeah, all right, guys, we're going to wrap up. Last
Speaker 1: chance to gossip about Joe. Any complaints you want to offload.
Speaker 2: No sick, I feel bad. I thought he had a
Speaker 2: call that.
Speaker 1: You're like, it's really yeah, he is sick. We should
Speaker 1: be nice to him. Carmen just put in like five
Speaker 1: different complaints about show in the IB channel.
Speaker 3: Didn he like the check out from Nico or something? Yeah,
Speaker 3: that was Yeah, that's been there. That along with the
Speaker 3: driverless carse the things that he's.
Speaker 1: Very impressed by technology nowadays. Lots More is produced by
Speaker 1: Carmen Rodriguez and dash Ol Bennett, with help from Moses Anda.
Speaker 1: Our sound engineer is Blake Maple.
Speaker 2: Sage Bauman is our head of Podcasts.
Speaker 1: We'll catch you next time for lots More.
Speaker 2: Thanks for listening.