WEBVTT - Why the True Price of a Bond Can Still Be Hard To Know 0:00:10.920 --> 0:00:14.400 Hello, and welcome to another episode of the Odd Thoughts Podcast. 0:00:14.520 --> 0:00:18.599 I'm Tracy Allaway and I'm Joe. WI isn't all so, Joe? 0:00:18.680 --> 0:00:22.320 I think equity markets have been um getting all the 0:00:22.360 --> 0:00:26.880 attention lately. Yeah, for good reason. Um, you know, the 0:00:26.920 --> 0:00:30.960 index level is extremely high, individual stocks all kinds of 0:00:31.000 --> 0:00:33.760 wild stories. But I am aware that there's also some 0:00:33.800 --> 0:00:37.279 interesting stuff in credit markets. I it's not getting as 0:00:37.320 --> 0:00:40.440 much attention, but I've kind of I'm aware that there's 0:00:40.479 --> 0:00:43.760 some stuff going on. Yeah, we're gonna try to fix 0:00:43.880 --> 0:00:48.479 the imbalance of of attention. In this episode. We're going 0:00:48.520 --> 0:00:51.199 to get very very um technical and a little bit 0:00:51.200 --> 0:00:54.560 wonky and take a look at not just credit as 0:00:54.600 --> 0:00:57.960 you mentioned, corporate bonds, but um, we'll also look at 0:00:58.200 --> 0:01:01.360 things like US treasuries. Um, what's going on there? So 0:01:02.040 --> 0:01:05.560 I should just say, as we're recording this episode, I 0:01:05.600 --> 0:01:07.800 was just looking at the yield on the thirty year 0:01:08.040 --> 0:01:11.600 and that's getting up to almost two per cent, which 0:01:11.680 --> 0:01:14.840 is a nice round number that people like to focus on. 0:01:15.240 --> 0:01:17.759 But the question, of course, is when we talk about 0:01:17.840 --> 0:01:21.400 bond yields, when we talk about bond prices, what exactly 0:01:21.440 --> 0:01:24.400 are we talking about. None of these trade on an exchange, 0:01:24.920 --> 0:01:28.480 So where does that pricing information come from? Yeah, this 0:01:28.560 --> 0:01:32.319 is always a fascinating question. We've discussed it in various 0:01:32.360 --> 0:01:35.720 forms a few times with Chris White as as well 0:01:35.760 --> 0:01:40.280 as others. Which is just this idea that Okay, everyone 0:01:40.400 --> 0:01:43.640 can look up on their monitor and see a quote 0:01:43.680 --> 0:01:47.000 for the say, um, you know, price of Microsoft shares, 0:01:47.480 --> 0:01:49.760 and we know where that comes from, and there's sort 0:01:49.800 --> 0:01:52.960 of like some sort of central repository for that. But 0:01:53.320 --> 0:01:56.760 in the world of fixed income, whether it's a sort 0:01:56.800 --> 0:02:01.160 of credit or rates, pricing is at a minimum much 0:02:01.240 --> 0:02:04.920 more distributed across all different kinds of platforms, all different 0:02:04.960 --> 0:02:06.720 kinds of players. In the idea that they're just sort 0:02:06.760 --> 0:02:11.400 of like one agreed upon price is um, it's not 0:02:11.480 --> 0:02:14.799 as much of a thing at all. Yeah, that's exactly right. 0:02:14.880 --> 0:02:18.920 And it's the kind of thing that people don't tend 0:02:18.960 --> 0:02:23.160 to talk about unless something bad is happening in the market, 0:02:23.240 --> 0:02:26.639 at which point suddenly everyone starts talking about bond pricing 0:02:26.760 --> 0:02:29.720 and what exactly, um, the process is there. And we 0:02:29.760 --> 0:02:33.000 saw a little bit of that in during the big 0:02:33.080 --> 0:02:35.080 market sell off. Of course, we had a lot of 0:02:35.120 --> 0:02:37.840 turmoil in credit. We also had a lot of turmoil 0:02:37.880 --> 0:02:41.000 in the U. S. Treasury market, and that's when people 0:02:41.040 --> 0:02:45.760 started talking about discrepancies in bond prices, which is it's 0:02:45.800 --> 0:02:50.440 never a good sign, is it. Uh No, it's like basically, 0:02:50.800 --> 0:02:54.120 you know, with all these things, it's like, once you 0:02:54.200 --> 0:02:56.760 have to start learning, by the time you're learning about 0:02:56.800 --> 0:03:02.040 how something actually works, usually that means trouble him. Yeah, exactly. 0:03:02.480 --> 0:03:07.600 So okay, yes, So today, um, we're going to be 0:03:07.680 --> 0:03:10.640 diving into the topic of bond pricing and we're gonna 0:03:10.680 --> 0:03:13.760 be talking to the authors of a paper that came 0:03:13.800 --> 0:03:18.600 out in January, a really really interesting paper by morning Star. 0:03:18.720 --> 0:03:24.480 It's called Bond Pricing Agreeing to Disagree and uh basically 0:03:24.520 --> 0:03:26.679 the authors on that crunched a bunch of numbers to 0:03:26.880 --> 0:03:31.679 really look at how different funds are pricing bonds and 0:03:32.000 --> 0:03:35.640 the discrepancies that are going on. So really interesting. Um So, 0:03:35.680 --> 0:03:38.960 without further ado, then let's bring on Eric Jacobson. He's 0:03:39.000 --> 0:03:42.360 a fixed income strategist at morning Star, and we'll bring 0:03:42.360 --> 0:03:45.680 on his co author as well, match Up Kawara. Thank 0:03:45.680 --> 0:03:48.240 you both for coming on, glad to be with you, 0:03:48.320 --> 0:03:51.440 thanks for having us. So, I guess first things first, 0:03:51.480 --> 0:03:53.560 but you know, Joe and I were joking a bit 0:03:53.560 --> 0:03:56.720 about how people don't tend to look at the technicals 0:03:56.720 --> 0:04:00.400 of bond pricing unless things are going wrong. What prompted 0:04:00.440 --> 0:04:02.880 you to do the paper? Well, there are a few 0:04:02.920 --> 0:04:06.040 things I think, you know, I hate to use the 0:04:06.080 --> 0:04:10.000 cliche that that crises are an opportunity, but when you're 0:04:10.000 --> 0:04:12.240 in the when you when you look at bond bonds 0:04:12.240 --> 0:04:15.360 and bond funds, the most exciting stuff always happens when 0:04:15.360 --> 0:04:18.760 something goes wrong. And that's really what happened as usual 0:04:18.880 --> 0:04:25.200 in in March, and we started thinking about what we 0:04:25.279 --> 0:04:27.280 might see in the data at that period of time. 0:04:27.400 --> 0:04:31.320 And there's a relatively new filing that is required by 0:04:31.320 --> 0:04:35.240 the SEC called MPort, which is really an electronic version 0:04:35.600 --> 0:04:39.200 of a portfolio filing, essentially almost the same as an 0:04:39.240 --> 0:04:43.200 annual report UM, but for you know, reasons that most 0:04:43.240 --> 0:04:46.279 people wouldn't really care about. Having it digitized makes a 0:04:46.360 --> 0:04:49.360 huge difference in being able to deal with the data. 0:04:49.600 --> 0:04:52.240 And so it gave us an opportunity, because obviously we 0:04:52.320 --> 0:04:55.479 collect that stuff across the industry. UM, it gave us 0:04:55.520 --> 0:04:58.479 an opportunity to pull some of the data that was 0:04:58.800 --> 0:05:00.719 that we knew would be very clean or as clean 0:05:00.760 --> 0:05:02.800 as we could imagine it to be given how it's 0:05:02.800 --> 0:05:07.640 submitted to the SEC and look at how different firms 0:05:08.080 --> 0:05:10.760 price their bonds at the end of a particular day, 0:05:11.080 --> 0:05:13.160 which you know, it's been possible to do that in 0:05:13.200 --> 0:05:15.040 the past, but as I just sort of alluded about 0:05:15.160 --> 0:05:17.320 the filing issue, it would have been it was a 0:05:17.400 --> 0:05:19.520 lot more difficult and a lot more difficult to do 0:05:20.200 --> 0:05:22.640 knowing for sure that the that the data was going 0:05:22.680 --> 0:05:25.880 to be filed consistently. So, uh, you know, unfortunately a 0:05:26.000 --> 0:05:27.680 very bad time in the market for a lot of people, 0:05:27.760 --> 0:05:30.840 third quarter at the end of the first quarter, but 0:05:31.360 --> 0:05:35.080 not a terrible time to do research. So what was 0:05:35.960 --> 0:05:41.000 your most striking finding in terms of the different prices 0:05:41.040 --> 0:05:44.680 that can emerge on the same security, the same bond, 0:05:44.760 --> 0:05:48.240 and the different approaches that a different holder took in 0:05:48.279 --> 0:05:51.320 their prices. Sure, so, you know, the first thing I 0:05:51.360 --> 0:05:54.680 would say is that we did not expect to see 0:05:55.640 --> 0:05:58.279 prices sort of on top of each other perfectly aligned. 0:05:59.320 --> 0:06:01.000 For some of the is I think that that you 0:06:01.040 --> 0:06:03.640 guys alluded to, But you know, some of it is 0:06:03.720 --> 0:06:07.400 just sort of structural in the sense of when when 0:06:07.440 --> 0:06:09.919 bond portfolios are marked, they're marked at the end of 0:06:09.920 --> 0:06:13.560 the day, and it's handled in slightly different ways depending 0:06:13.680 --> 0:06:17.279 on the firm that's doing it and some of the 0:06:17.320 --> 0:06:20.400 decisions that they make about pricing. So one of them 0:06:20.480 --> 0:06:24.320 is simply what time of day, and you can price 0:06:24.440 --> 0:06:27.599 bond portfolios that either three o'clock or flour o'clock. It 0:06:27.600 --> 0:06:29.880 seems that there's a lot more consistently, and there used 0:06:29.920 --> 0:06:31.440 to be a lot more firms are doing at three 0:06:31.480 --> 0:06:34.320 o'clock hour, but there is some diversity in that they 0:06:34.320 --> 0:06:38.000 also have the option of choosing to price either at 0:06:38.040 --> 0:06:40.880 the bid or the ask or the mid and so 0:06:41.560 --> 0:06:45.400 that's just another layer of difference there. And most firms 0:06:45.480 --> 0:06:47.680 are also, well pretty much all the firms that we 0:06:47.720 --> 0:06:51.000 know of a all use third party pricing services. And 0:06:51.040 --> 0:06:53.200 so then you add to add to the fact that 0:06:53.240 --> 0:06:55.719 there are a multitude, not not a huge number, but 0:06:55.760 --> 0:06:58.560 there are different services. So once you get through all 0:06:58.560 --> 0:07:01.040 three of those lenses, it's certainly posible for prices to 0:07:01.080 --> 0:07:04.000 be somewhat different. And you know, I think that the 0:07:04.080 --> 0:07:06.360 key issue here, I think you guys were talking before 0:07:06.360 --> 0:07:08.840 about the end of day price for a stock. Part 0:07:08.880 --> 0:07:10.760 of the reason for this that we have this issue 0:07:10.880 --> 0:07:14.280 is that um even if you are able to observe 0:07:14.520 --> 0:07:17.280 a price, you know, at two o'clock in the afternoon 0:07:17.280 --> 0:07:21.520 for a particular bond, and it's recorded by FINNRA, that's 0:07:21.600 --> 0:07:24.840 the regulator, and it's disseminated through trace, which is a 0:07:24.880 --> 0:07:27.800 reporting system. If that's not the price, if if that 0:07:27.880 --> 0:07:30.800 trade doesn't happen anywhere near the close of the market, 0:07:31.440 --> 0:07:35.080 then the somebody has to look at what that bond 0:07:35.120 --> 0:07:37.440 and say, well, this is what the price should have 0:07:37.480 --> 0:07:39.160 been at the end of the day, because the market 0:07:39.280 --> 0:07:42.560 shifted between the last trade and now, and we really 0:07:42.600 --> 0:07:44.720 need to change the price to reflect that. And that's 0:07:44.760 --> 0:07:46.480 part of you know, where you get all this difference. 0:07:46.480 --> 0:07:48.760 Of course, as we mentioned in the paper, there are 0:07:48.800 --> 0:07:50.920 lots of bonds that don't trade at all in a 0:07:50.960 --> 0:07:55.000 single day either, so that complicates things as well. Finally, 0:07:55.040 --> 0:07:59.280 I would say there's always a possibility that that the 0:07:59.360 --> 0:08:02.640 asset amount you can challenge the price that comes from 0:08:02.680 --> 0:08:09.640 from pricing service. So that's that as another layer of complexity. 0:08:09.840 --> 0:08:13.440 You know that they they may think that they know 0:08:14.760 --> 0:08:19.240 the real value of that bond better than the pricing agency, 0:08:19.280 --> 0:08:25.400 which which is quite conceivably true. If one manager challenges 0:08:25.480 --> 0:08:29.800 the bond and another firm doesn't, then you know, prices 0:08:29.880 --> 0:08:33.360 might look different for that reason as well. Can you 0:08:33.440 --> 0:08:38.280 talk a little bit more about the third party pricing services, 0:08:38.400 --> 0:08:41.880 because I think this is sort of whenever people hear 0:08:41.920 --> 0:08:44.880 about this UM for the first time, I think it's 0:08:45.000 --> 0:08:47.920 difficult for a lot of people to get their heads 0:08:47.920 --> 0:08:52.080 around that there are actually companies out there whose job 0:08:52.280 --> 0:08:58.720 is to kind of triangulate the price of a corporate bond. Sure, 0:08:59.200 --> 0:09:02.760 so it's interesting because you know, people will sometimes ask, 0:09:03.480 --> 0:09:06.160 you know, why wouldn't you just price the bond yourself 0:09:06.200 --> 0:09:08.840 if you're a manager, and as much it just eluded 0:09:09.120 --> 0:09:12.600 maybe in some cases a bond that's not widely held, 0:09:13.280 --> 0:09:15.200 maybe the manager it knows even more about it. The 0:09:15.200 --> 0:09:18.240 pricing service. You know that the truth is is that 0:09:18.240 --> 0:09:20.800 we've evolved into this system because the goal is to 0:09:20.880 --> 0:09:24.880 have a third party or an arms length party, if 0:09:24.880 --> 0:09:28.360 you will, UM making those pricing determinations, to sort of 0:09:29.240 --> 0:09:32.559 remove the manager a step away from that decision. Since 0:09:32.640 --> 0:09:35.320 the decision that the manager, the decision that's made on 0:09:35.320 --> 0:09:39.320 that price can affect the performance of an account that 0:09:39.400 --> 0:09:42.520 a manager is running, and so forth. And it's the 0:09:42.600 --> 0:09:44.920 kind of thing that has evolved over the years. Um, 0:09:45.440 --> 0:09:48.840 I haven't been involved in bond pricing directly, so it's uh, 0:09:48.880 --> 0:09:50.760 you know, I don't have the full history of the 0:09:50.800 --> 0:09:53.000 industry at my fingertips, but I can tell you that 0:09:53.360 --> 0:09:56.880 pricing has historically a lot of that information has come 0:09:57.000 --> 0:10:01.560 from broker dealers themselves, so uh, and even today, the 0:10:01.600 --> 0:10:04.040 pricing services do talk to the broke dealers, and there 0:10:04.080 --> 0:10:07.760 are pricing services that are associated on some cases with 0:10:08.040 --> 0:10:11.240 broker dealers as well, so it's kind of a mix there. 0:10:11.280 --> 0:10:15.160 But you know, the idea is that, um, when you 0:10:15.200 --> 0:10:18.400 have a portfolio of you know, a hundred and fifty 0:10:18.440 --> 0:10:20.920 different bonds or maybe a thousand when you're talking about 0:10:20.920 --> 0:10:24.840 mortgages are a very large mutual fund, you need to 0:10:24.880 --> 0:10:27.520 be able to gather market information very very quickly in 0:10:27.640 --> 0:10:29.559 order to that kind of pricing. So it makes sense 0:10:29.600 --> 0:10:31.960 to have a third party do it. And one of 0:10:31.960 --> 0:10:34.720 the advantages of having an agency that's that's sort of 0:10:34.760 --> 0:10:38.359 independent is that they can be in touch with multiple dealers, 0:10:38.480 --> 0:10:41.079 they can take in all the data feeds, and they 0:10:41.120 --> 0:10:44.280 also have systems in place so that, um, if there 0:10:44.320 --> 0:10:48.160 isn't any really fresh information, but they have a signpost 0:10:48.200 --> 0:10:50.600 of some kind to work off of for example, you 0:10:50.640 --> 0:10:53.040 know that the bond has this level of maturity, you 0:10:53.080 --> 0:10:56.319 know that it has this credit rating, it's in this sector, 0:10:56.440 --> 0:10:59.840 and etcetera. You can sort of triangulate a prices. I 0:10:59.840 --> 0:11:02.880 think someone said, um, they use a lot of different 0:11:02.880 --> 0:11:05.880 tools for that. Some of them are now they're starting 0:11:05.920 --> 0:11:08.080 to use AI for some of that stuff. But the 0:11:08.120 --> 0:11:11.920 idea of fundamentally is to try and get that to 0:11:12.000 --> 0:11:16.040 be as dispassionate as as decision as possible. UM. And 0:11:16.480 --> 0:11:17.800 you know, one of the things that we talked about 0:11:17.800 --> 0:11:19.720 in the paper is one of the reasons that you 0:11:19.840 --> 0:11:23.560 have some differentiation aside from the other factors, is that 0:11:23.600 --> 0:11:26.680 there are a good handful of pricing services, and some 0:11:26.880 --> 0:11:31.840 firms may use a single service for everything, but most 0:11:31.880 --> 0:11:34.000 of the larger mutual fund managers that most people are 0:11:34.000 --> 0:11:37.720 invested with, UH pick and choose among the services depending 0:11:37.720 --> 0:11:40.960 on the asset class that they're that they're using. And 0:11:41.000 --> 0:11:43.480 then UH and so, for example, you know, if they 0:11:43.559 --> 0:11:46.559 are looking at one particular kind of mortgage bond for 0:11:46.679 --> 0:11:48.880 a private mortgage security, the kind that blew up during 0:11:48.880 --> 0:11:51.000 a crisis, they may use a single pricing service just 0:11:51.080 --> 0:11:53.560 for that and use somebody else for for all the 0:11:53.559 --> 0:12:12.719 other sectors, So you know, this comes up every once 0:12:12.760 --> 0:12:15.680 in a while. Obviously, Q one of last year was 0:12:15.720 --> 0:12:19.400 one time, I forget, what is it, tracy, when were 0:12:19.400 --> 0:12:23.520 we talking about like energy bonds in the junk bond 0:12:23.640 --> 0:12:26.800 E t F like years ago. I feel like that 0:12:26.920 --> 0:12:32.160 was late, I want to say, although, yeah, I think 0:12:32.200 --> 0:12:36.120 it happened. No, I think, but I want so yeah, yeah, 0:12:36.120 --> 0:12:38.360 I think it was late. And I know there's like 0:12:38.360 --> 0:12:40.400 a bunch there's like an oil crash or a bunch 0:12:40.440 --> 0:12:44.120 of junk bond E t F got dislocated. Hasn't really 0:12:44.160 --> 0:12:48.600 been a problem yet, this question of ambiguous bond pricing 0:12:48.840 --> 0:12:52.000 of instruments that don't trade, because I know there's all 0:12:52.000 --> 0:12:54.800 these questions that emerge about the sort of liquidity mismatch 0:12:54.840 --> 0:12:56.839 where the bonds don't really move, but the E t 0:12:57.000 --> 0:12:59.840 F that or the funds that own the bonds have 0:13:00.000 --> 0:13:04.280 to provide daily prices or even intramarket daily liquidity. How 0:13:04.320 --> 0:13:06.720 big of an issue is this because so far it 0:13:06.760 --> 0:13:10.160 seems like mostly the infrastructure has work. Yeah, I think. 0:13:10.280 --> 0:13:14.440 You know, one of the benefits of the mutual fund 0:13:14.480 --> 0:13:17.240 structure in particular is that you know a lot of 0:13:17.280 --> 0:13:22.319 these differences get kind of washed out on a large portfolio. 0:13:22.920 --> 0:13:25.360 So even in a mutual fund that you know that 0:13:25.400 --> 0:13:28.440 has truly billions and billions of dollars, even if there 0:13:28.440 --> 0:13:30.679 are a good handful of bonds where the pricing seems 0:13:30.720 --> 0:13:32.600 to be all over the map, you know, when you 0:13:32.960 --> 0:13:35.240 when you add all that up and average it out, 0:13:35.760 --> 0:13:37.680 they turn out to be kind of rounding errors in 0:13:37.679 --> 0:13:40.280 a lot of cases. UM we still have some research 0:13:40.320 --> 0:13:42.800 to do on that, because we haven't gone through the 0:13:42.920 --> 0:13:45.040 entire universe and done it at the fund by fund level, 0:13:45.360 --> 0:13:48.600 but that seems to be the case for the most part. 0:13:48.920 --> 0:13:50.839 You know. The big problem, as you alluded though, is 0:13:50.880 --> 0:13:53.960 when you wind up in a big crisis situation, and 0:13:54.679 --> 0:13:58.360 the more concentrated a portfolio, and the worst the crisis 0:13:58.360 --> 0:14:01.320 and the longer at last, the bigger problem that can be. 0:14:01.559 --> 0:14:04.400 And of course you know this isn't exclusive to bonds. 0:14:04.480 --> 0:14:06.760 It doesn't happen, you don't notice it nearly as often 0:14:06.920 --> 0:14:09.320 with equities, but that you alluded to earlier, you know, 0:14:09.360 --> 0:14:12.480 if you have private placements in a mutual fund or 0:14:12.600 --> 0:14:15.760 you know, very very large slugs of a of a 0:14:15.840 --> 0:14:20.720 private company that's spread around UM, and and that happens 0:14:20.800 --> 0:14:24.720 you know, often with with young uh startup companies, where 0:14:24.720 --> 0:14:27.920 small cap funds get involved, why to put big tech names? 0:14:28.560 --> 0:14:31.160 There can be disagreements about things like that too. Usually 0:14:31.240 --> 0:14:34.280 it's not that big a deal to small investors when 0:14:34.280 --> 0:14:38.680 you have diversified funds um But as I said, crisis 0:14:38.720 --> 0:14:41.720 last lasts long enough, or you have a concentrated enough portfolio, 0:14:42.400 --> 0:14:45.280 that's when it really starts to make a difference. So 0:14:45.360 --> 0:14:47.800 can we talk about that a little bit more in 0:14:47.880 --> 0:14:52.920 your paper? What exactly what was the difference in bond 0:14:53.000 --> 0:14:58.240 pricing differences in normal times versus something like the first 0:14:58.320 --> 0:15:02.160 quarter of twenty twenty, because I think your study looked 0:15:02.160 --> 0:15:06.360 at late which was a relatively calm period in markets, 0:15:06.880 --> 0:15:10.560 and then the end of March. So what was the 0:15:10.600 --> 0:15:14.760 difference between those two periods? Sure, so, as you alluded, 0:15:14.800 --> 0:15:19.080 we we started in September, and just to clarify, you know, 0:15:19.120 --> 0:15:23.800 we used quarter end data and so this was essentially 0:15:23.880 --> 0:15:27.080 data on the last day of the quarter, at the 0:15:27.160 --> 0:15:31.320 end of the day and looked across funds and across 0:15:32.080 --> 0:15:35.520 bonds that were appearing in more than one fund. Well, 0:15:35.520 --> 0:15:37.400 this is kind of a nuanced in and of itself. 0:15:37.400 --> 0:15:39.000 But when I say more than one. What I really 0:15:39.000 --> 0:15:43.040 mean is more than one firms funds because each firm, 0:15:43.120 --> 0:15:45.480 no matter how many funds they have, if they own 0:15:45.520 --> 0:15:49.040 the same bond across multiple funds, the structure is to 0:15:49.240 --> 0:15:51.680 price them all at the same price. So when we 0:15:51.720 --> 0:15:53.920 talk about this, we talked about how many firms priced 0:15:53.960 --> 0:15:56.520 the bond, and that appear in the portfolios we looked 0:15:56.560 --> 0:16:01.560 at um. But when you go back to September, for example, 0:16:01.600 --> 0:16:06.600 as you asked, if you take corporate high quality, corporate bronze, 0:16:06.640 --> 0:16:10.120 but corporate brons in generalist, essentially, the differences in price 0:16:10.880 --> 0:16:14.200 were fairly narrow. We use a term that we call 0:16:14.280 --> 0:16:17.920 the price spread percentage, where we took the lowest price 0:16:18.000 --> 0:16:20.960 and the highest price that we found, and then we 0:16:21.120 --> 0:16:25.360 took that the difference between those two and we divided 0:16:25.400 --> 0:16:29.480 it by the mean average, and that gave us this 0:16:29.640 --> 0:16:32.000 price spread percentage. And so if you look at triple 0:16:32.040 --> 0:16:34.240 A and double A bonds at the end of September 0:16:35.760 --> 0:16:38.360 UM that number was very small. It was only about 0:16:38.400 --> 0:16:41.800 thirty basis points for double and triple A and it 0:16:42.120 --> 0:16:45.640 got you know, a triple B was point three seven, 0:16:45.720 --> 0:16:49.000 so pretty small. Those numbers are still meaningful in the 0:16:49.160 --> 0:16:52.840 in the framework of um. You know a market where 0:16:53.400 --> 0:16:55.920 returns for a whole year, you know, the yield on 0:16:55.920 --> 0:16:58.800 on bonds, as you just mentioned earlier, the thirty year 0:16:59.240 --> 0:17:02.400 not quite even two. That's a meaningful number, but it's 0:17:02.480 --> 0:17:06.160 it's within the realm of expectations given all the things 0:17:06.200 --> 0:17:09.960 that we said earlier about prices, and then they do 0:17:10.119 --> 0:17:14.280 tend to get a little bit wider. The the thinner 0:17:14.320 --> 0:17:18.560 the market, lower the quality, the smaller the range of 0:17:19.359 --> 0:17:20.959 values and the bonds part of me what I mean 0:17:21.000 --> 0:17:23.399 to say is, you know, the high yield market is 0:17:23.400 --> 0:17:27.479 many times smaller, for example, than the investment grade corporate market, 0:17:27.760 --> 0:17:30.080 and so you expect more dispersion there, and that's what 0:17:30.160 --> 0:17:34.800 you saw at that point. And then, of course, by contrast, 0:17:34.880 --> 0:17:38.439 when we looked at the end of the first quarter, 0:17:38.880 --> 0:17:44.560 of those numbers were in some cases multiples. So I 0:17:44.640 --> 0:17:48.200 mentioned earlier thirty basis points for the price fred percentage 0:17:48.240 --> 0:17:52.639 for triple A double A corporates at the end of 0:17:52.760 --> 0:17:58.680 March was one, and then the number for triple B 0:17:58.680 --> 0:18:02.679 bonds was two points seven two percent, so literally multiples 0:18:02.840 --> 0:18:06.480 of what we saw at that point. Just another snapshot 0:18:06.480 --> 0:18:12.679 in time. Your thoughts on this sort of significance of 0:18:12.720 --> 0:18:18.080 these figures are what they imply. As Eric said, especially 0:18:18.080 --> 0:18:22.240 in the in the in the crisis mode, these differences 0:18:22.280 --> 0:18:26.840 were way bigger than we expected. One thing that I 0:18:26.920 --> 0:18:30.240 would maybe want to mention is that, you know, I 0:18:30.280 --> 0:18:33.359 remember this old paper that Fisher Black of the famous 0:18:33.560 --> 0:18:37.879 um you know Black and shows formula. You wrote this 0:18:38.000 --> 0:18:41.119 paper at some point, I forget what exact name of 0:18:41.200 --> 0:18:45.160 seven is called noise, And this is kind of what 0:18:45.200 --> 0:18:48.639 we're dealing with here a little bit. You know, the 0:18:48.680 --> 0:18:51.879 bond prices are noisy. You know, they are not perfect. 0:18:52.720 --> 0:18:56.679 We don't know for sure what a given bond is 0:18:58.080 --> 0:19:01.879 it's worth, and that's what we see being here. So 0:19:02.000 --> 0:19:07.720 on the plot positive side, um, you know. Fisher Black 0:19:07.760 --> 0:19:11.480 asked the question, you know, when would you say that 0:19:11.560 --> 0:19:15.560 the market is efficient? And as the answer was, if 0:19:15.680 --> 0:19:17.879 if there is some kind of a true value which 0:19:17.920 --> 0:19:21.399 we don't know about, but let's assume that it is there. 0:19:22.600 --> 0:19:25.360 Fisher Black said that the market will be efficient if 0:19:26.000 --> 0:19:29.360 if the the market is efficient if it will assign 0:19:29.440 --> 0:19:34.200 a price within the factor of two of the real 0:19:35.200 --> 0:19:41.280 unobservable true value. So if if something is something let's 0:19:41.280 --> 0:19:46.280 say is is is there's an instrument who's true values 0:19:46.359 --> 0:19:49.520 let's say a hundred then Fisher Black would say that 0:19:49.560 --> 0:19:52.919 the market is efficient if if if it assigns at 0:19:53.040 --> 0:19:57.320 the value of somewhere between fifty and two hundred um. 0:19:57.560 --> 0:20:00.760 That was his definition. So what we see here, you 0:20:00.800 --> 0:20:04.639 know this is these are these are fractions of of 0:20:04.840 --> 0:20:08.919 what official Black thoughts might still constitute an efficient market. 0:20:09.000 --> 0:20:14.600 So in that sense, we are not seeing anything critical here. 0:20:15.240 --> 0:20:18.360 On the other hand, as I mentioned, if you see 0:20:18.359 --> 0:20:24.360 attempt percentage point price differential between between bonds, that that 0:20:24.400 --> 0:20:27.080 can well be like two years worth a yield for 0:20:27.200 --> 0:20:31.199 some events, for high yield issue, right, so that is 0:20:31.280 --> 0:20:38.640 a potential, uh, you know, point of concern. Um, I'm 0:20:38.640 --> 0:20:44.280 not sure what solution to this problem might be. Nothing 0:20:44.560 --> 0:20:47.119 obvious count comes to mind. If we don't want to 0:20:47.240 --> 0:20:52.280 end up with just one pricing service, we don't probably 0:20:52.280 --> 0:20:56.640 want the government to dictate what that price is. So 0:20:57.560 --> 0:21:00.280 I think we are stuck with the system that that 0:21:00.520 --> 0:21:05.280 we have here. Let's just hope it continues to function 0:21:05.600 --> 0:21:10.520 reasonably well. One thing that Eric probably didn't highlight, so 0:21:10.720 --> 0:21:13.520 our sample that we are dealing with, we are only 0:21:13.560 --> 0:21:18.200 dealing with bonds that had at least two different firms 0:21:18.280 --> 0:21:22.439 pricing it. Now, it turns out that this is in 0:21:22.480 --> 0:21:26.679 many cases the minority of all the bonds. Most of 0:21:26.680 --> 0:21:29.639 the bonds that we are dealing with in these sectors 0:21:29.960 --> 0:21:33.199 and especially in the municipal market, they are owned only 0:21:33.240 --> 0:21:37.560 by one firm. So we don't really know. We can't 0:21:37.880 --> 0:21:40.080 you know, you have only one price that you can't 0:21:40.119 --> 0:21:43.520 talk about how spread out that price is, right, but 0:21:43.680 --> 0:21:46.560 that that seems to be that seems to be more 0:21:46.560 --> 0:21:49.840 of a norm than one would expect. So we're kind 0:21:49.840 --> 0:21:52.600 of dealing with these two issues. One is only one 0:21:53.640 --> 0:21:58.200 one player owns a given bonds and secondly, what Eric mentions, 0:21:58.320 --> 0:22:02.760 these bonds oftentimes go through long periods of not being 0:22:02.760 --> 0:22:07.280 traded at all, So so how do you a sign 0:22:08.720 --> 0:22:12.159 a price to what? Instruments like that? Though I don't remember, 0:22:12.280 --> 0:22:15.159 we were talking to somebody from a who came from 0:22:15.200 --> 0:22:18.959 a big firm, and he was telling us that this 0:22:19.040 --> 0:22:25.040 was in the context of of some emerging market paper. 0:22:25.920 --> 0:22:27.440 You know, they had to put a price on it. 0:22:27.440 --> 0:22:30.200 Says this bond hasn't traded for seven years. Now, who 0:22:30.240 --> 0:22:33.280 really knows what it's worth, So we're going to just 0:22:33.320 --> 0:22:35.600 say that it's worth seventy dollars and it's going to 0:22:35.720 --> 0:22:40.000 be done with it. Wow. So I know we're talking 0:22:40.000 --> 0:22:42.840 about how especially when when you look at something like 0:22:42.920 --> 0:22:45.800 new knees or something like corporate bonds where they really 0:22:45.800 --> 0:22:50.000 aren't trading that regularly, there's a tendency to say, well, 0:22:50.200 --> 0:22:53.440 this isn't the fact that there are pricing discrepancies, isn't 0:22:53.480 --> 0:22:56.800 that worrying? And they tend to get sort of normalized 0:22:56.920 --> 0:22:59.400 in the long term and everything kind of works out. 0:22:59.520 --> 0:23:03.560 But one thing that was really surprising in your paper 0:23:03.920 --> 0:23:09.280 was that you also found price discrepancies in treasuries during 0:23:09.320 --> 0:23:12.840 the worst of the market sell off in And this 0:23:12.920 --> 0:23:16.120 is supposed to be, you know, a huge and liquid 0:23:16.359 --> 0:23:21.640 and standardized market, and yet in March of last year, 0:23:21.800 --> 0:23:26.040 people seem to have difficulty agreeing what US government debt 0:23:26.160 --> 0:23:29.399 was actually worth. Um, can you walk us through your findings? 0:23:29.440 --> 0:23:32.159 And then also, I guess your thoughts around this, like, 0:23:32.200 --> 0:23:36.560 how could that possibly have happened? Sure, so what you 0:23:36.600 --> 0:23:38.919 said is right on. You know, we we when you 0:23:38.960 --> 0:23:41.440 look at the data for the end of the third 0:23:41.520 --> 0:23:46.240 quarter of UM, the differences were very very small. Um. 0:23:46.440 --> 0:23:48.240 You know, anyone looking at our charts, we'll see that 0:23:48.280 --> 0:23:50.960 there are cases where there are these outliers that show 0:23:51.040 --> 0:23:54.639 up in the data, and you know, we've audited a 0:23:54.720 --> 0:23:58.760 number them and found that it's the data. We the 0:23:58.800 --> 0:24:00.919