July 2, 2025 • 29 mins
Okay, that's quite a title but we think it's justified! In this special episode — recorded live onstage at our June 26 event in New York City — we bring together some of the best thinkers we know when it comes to the US Treasury market. US government bonds form the backbone of global financial markets, and are the "risk-free" rate to which all other rates are benchmarked. But recently, there's been concern about who will buy all those bonds as the US deficit explodes higher. Meanwhile, there have been long-running concerns about volatility and liquidity in the market. We speak with Nellie Liang, senior fellow of economic studies at the Brookings Institution and former undersecretary of the Treasury for domestic finance, Ira Jersey, chief US interest rate strategist at Bloomberg Intelligence, and Josh Younger, a lecturer at Columbia University and repeated Odd Lots guest.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to a very special episode of the
au Thoughts podcast. I'm Tracy Alloway.
Speaker 3 (00:23):
And I'm Jill.
Speaker 4 (00:24):
Why isn't thal So what you are.
Speaker 2 (00:25):
About to hear has the very very modest title of
the best ever panel on the world's most important market,
that is the US Treasury market. Of course, this was
recorded live at our New York event on June twenty sixth.
Speaker 4 (00:40):
That's right. We had our recent oud Loots live event
in New York, and there's so much going on in
the treasury markets. There's questions about raids, there's questions about
foreign demand, there's questions about liquidity and the capacity of
existing treasury market infrastructure to handle all of the volume
of debt out there. So we wanted together some of
our favorite people to actually understand what's going on.
Speaker 2 (01:00):
Yep, who's going to buy all the bonds? And we
did it. Indeed, have an absolutely amazing panel. So we
had Nellie Lang, she is a senior fellow over at
the Brookings Institution. She is also the former Undersecretary of
the Treasury for Domestic Finance. We had Ira Jersey, who
you might remember from a previous episode. He is the
chief US interest rate strategist over at Bloomberg Intelligence. And finally,
(01:24):
we had an odd thoughts favorite Josh Younger. He is
a lecturer at Columbia University, among many other things. So
we hope you enjoy take a listen.
Speaker 4 (01:34):
So is anyone worried about who's going to buy the debt?
Speaker 3 (01:39):
Who goes first for that one? Well, I.
Speaker 5 (01:42):
Mean, I guess I'll start. I'm not worried about who's
going to buy the debt. You know, when we think
about markets generally, and especially markets for sovereign debt of
large countries that are relatively liquid, there will be a
buyer now the price might change, And I think that's
one of the things we have seen somewhat in recent weeks.
(02:03):
When you have somewhat of a slowing economy in the US,
you certainly see like two year yields have actually gone down,
you know, better part of fifty basis points over the
near term, but the long end hasn't done very much
at all. And I think that that is at least
in part and indication that there are some people who
are a little bit scared to buy that debt without
(02:23):
having some type of premium put onto it, so it'll
get bought.
Speaker 3 (02:27):
The question is at what price?
Speaker 5 (02:28):
And that's different, right, Like, I'm an investment strategist, I'm
not a policymaker, right, and I think that there's some
people who kind of mess that up with what like
our job is. When Nelly was at the Treasury Department,
she had a much different view of the world that
she had to do as opposed to what we do
as investors.
Speaker 2 (02:47):
Well, I mean, on that note, it is true that
we have more i would say, price sensitive buyers in
the market than we used to. Right, So, we used
to have a lot of central banks, a lot of
sovereign wealth funds. They're still there, but compared to stick buyers,
retail like that has grown a lot more. Nellie, does
that change the way you think about debt versus you
(03:07):
know some years.
Speaker 6 (03:08):
Ago absolutely so said prices will adjust, there will be
a buyer. But it used to be decades ago we
just had a much more stable investor base central banks,
foreign funds. Now it's like the non bank what we
would call the non bank financial institutions. It's hedge funds
(03:30):
for various reasons, private funds who use treasuries for liquidity
risk management. So the minute things get volatile, they'll want
to sell treasuries to help manage their own positions. And
so the investor base has changed. There will be buyers,
but it could change the price and change the way
(03:50):
prices fluctuate. You know, there just can be much more
volatility given the changing investor base. And that's something that Treasury,
who has to issue the debt regularly. We when I
was at Treasury, probably two hundred and fifty auctions a year.
They think about that, and it does affect how you
(04:10):
think about bills versus longer term coupons and all that.
Speaker 7 (04:15):
I guess I would it's definitely saying the same thing
I should start with. I thought i'd get away from
disclaimers when I left the FED, but I have to say, hey,
disclaimer which is this is not investment advice and place
that has lots of positions, and nothing I say should
implicate what positions we may have or not have that said,
I you know, I think it's a similar way to
(04:37):
ask the question is why are they buying the debt
because the market's going to clear the price. We may
or may not like that price, but prices used to
fluctuate like all over time for various reasons. I mean,
during the Civil War we had a captive demand base
because if you wanted to be a bank, you had
to buy treasuries, and yet the price moved right, And
so for me, it's are you buying a security to
hedge a liability that is of similar duration to the
(05:01):
thing you're buying. Are you in it for the long haul?
And classic examples like a life insurance company which has
very long term longevity indexed is the term of art, right,
It's like, as long as you people are alive, there's
going to be life insurance. For companies, they have to
buy debt of similar length and they're going to be
very stable. They might be price sensitive, but probably less so.
And at the end of the day, they have this
(05:21):
liability that has to get funded. Banks to the same
extent have these very long term liabilities deposits or long
term liabilities, as we talked about that on one of
the episodes. So they need long term assets to hedge
the long term liabilities. Because you have bank accounts, you
can get your money back whenever you want, but you
tend not to, right, So that's a long term liability.
A hedge fund is not in it for ten years,
because that is not the nature of the business. They
(05:44):
are responding to price signals and relative value. Treasury trading
is really just a response to price signals where the
market is attempting to find the lowest cost buyer. There's
this great book from the nineteenth century which is inspiration
for Freeman on that a Freeman Night. But like it's
an interesting story which called Feeding Paris, which is by
Bustiacht and a French economist, and he was saying, if
one person was responsible for feeding Paris, everyone would die,
(06:07):
because it's impossible feed a million people if you're making
all of these decisions on your own. So price signals
get the food to where it has to go when
it has to go there. And so like the miracle
of the price mechanism is the fact that Paris wakes
up every morning and has food eat. And it's still true, right,
I mean, cities are complicated, and so in the treasury
market case, the feeding Paris equivalent is basis trades and
(06:29):
swap spread trades and every instance of buying a security
with levered money, repo and things like that, and hedging
the risk with the derivative where the price difference between
those things makes that worthwhile. And that's also a signal
that we don't have enough of those liability hedgers who
are in it for the long haul. We have to
find somebody else.
Speaker 4 (06:48):
What are the data points we should be looking at,
because if I look at the ten year yield, you know,
it's something to do with the long term trajectory of
monetary policy, and that's going to fluctuate for various reasons
inflation growth, et cetera. If we want to capture some
of these other dynamics such as the change and who
are the buyers, or just the desire to even own
US dollar denominated debt assets, what should what else should
(07:12):
we be looking at?
Speaker 5 (07:13):
Well, So the way that I look at US treasuries,
assuming that there's not real credit risk, right, yeah, I would,
I would still I would still argue that there's still
not credit risk more than a couple of basis points
that's embedded in the current yield of say the ten
year treasury, then ten year treasuries.
Speaker 3 (07:30):
Again, the way that I look at it, it have to
be somewhere around nominal GDP growth.
Speaker 5 (07:34):
Right, So basically at the trajectory of what is the
growth rate of the country in the longer run, and
that's what the market is going to spit out, plus
or minus, like you said, some kind of liquidity or
either premium or discount. Now I would argue that with treasuries.
To Josh's point, right there is that markets that have
deep liquid funding markets, deep liquid derivatives markets, in order
(07:57):
for someone to hedge that risk, you tend to get
better outcomes and lower yields because of that. So you know,
we did a study I actually when I was back
at Credit Sueez, I did something actually for the for
a World Bank study about what is liquidity and just
about every single OECD government bond market in the world.
And what you determined is bid offers were tightest when
(08:19):
you had deep in liquid funding markets like repo and
when you had derivative markets. So you look at Italy
that basically didn't have a derivative market that was particularly
deep in liquid versus France, which did, and a Spain
that did. Actually, so Spanish spreads were actually tighter than
Italian spreads, not that the yield levels might have been
the same, righting, But the difference is those deep liquid
(08:43):
like ancillary markets around things matter, and that's where the
US is unlike any other country in the world, because
we have all of those things in abundance that very
few other markets have, you know, And I think that's
one reason why it's going to be difficult for people
not to be involved with treasuries, either as a liability
management tool or as a trading instrument.
Speaker 6 (09:05):
Uh well, oh, Mellie, please, I was just going to add,
I think just to emphasize, you know, it is long
term how to think about yield's long term nominal GDP growth,
but there's a lot of uncertainty about that growth and
that comes and you know, that fluctuates, and so if
you're uncertain about inflation, even if you have an expected
path of inflation, if it's high, it might be more volatile.
(09:28):
Or if you're uncertain about policies, any kind of policy
either you know, whether you're going to support the dollar
or you're going to support the US as a safe haven,
or you're going to support debt or try to reduce debt.
That adds uncertainty. So then treasury is you know, like
in long long run it is nominal GDP, but in
(09:49):
the meantime you're kind of going to fluctuate what these
we call premiums or discounts, you know, depending on how
much uncertainty there is about that. I tend to think
there's a fair amount of uncertainty about that. Right now.
Speaker 2 (10:00):
Can you convince Joe that there is such a thing
as the term premium?
Speaker 6 (10:06):
Well, yes, because so because if you define term premium
as the expectations hypothesis less, whatever the current yield is,
there's a residual, and that is a term premium. Then
you just try to define. You try to use things
you know about to explain the residual, but there's always
(10:28):
something left, and that, to me is a term premium empirically. Empirically,
I don't know if I'm going to convince you.
Speaker 5 (10:34):
I think I called it on Bloomberg Radio. Actually I
called it the dark matter of the treasury market. Right,
that term premium must exist. The question is do we
measure it properly?
Speaker 3 (10:45):
Right?
Speaker 5 (10:46):
And that's the art of it as opposed to the
science of term premium.
Speaker 7 (10:50):
So I like the easiest possible way to do this,
which is just to ask people what they think short
rates are going to be of a long run and
what long term rates are going to be tomorrow, and
the Philly Fad does this recorder and there is as
the Philly Fed. Okay, so they just ask economists to
make predictions as to what they think this that or
the other thing I'm going to do. And there's like
inflation and GDP growth and all these other things. But
(11:11):
once a year, I think the first quarter, so we
probably get that either now or soon. They ask tenure
average teable yields, and then they also ask about the
tenure yield, and so you're just literally asking people. There's
a lot of bells and whistles you can put on
these models, and some of the models with bells and
whistles incorporate the survey data. Some people just look only
at the survey data. Some people do just the modeling.
(11:31):
But in all these cases there's a residual doesn't mean
it's positive.
Speaker 3 (11:35):
Is the really key thing? Term premium can be negative.
Speaker 4 (11:39):
You can see why I'm unsatisfied.
Speaker 3 (11:41):
Yeah, like this is the thing is dark matter.
Speaker 4 (11:44):
They ask these surveys, yeah, which doesn't really like they
ask they ask a random survey. Sometimes it gains negative.
You can see why, Like I'm skeptical, Like, yeah, I'm
not totally satisfied by any of this.
Speaker 5 (11:56):
No, there's a difference between the two year yield and
the ten year yields, so therefore that difference also true.
Speaker 6 (12:02):
That could be the expectations of But you can write
down what you think or a survey of what you
think is between the two and ten and there's usually
a residual and can be positive or negative.
Speaker 3 (12:16):
And having got we can.
Speaker 6 (12:18):
Often be explained correlated with things like inflation, expectations.
Speaker 7 (12:22):
Or other kinds of uncertain I tell you from experience
with both dark matter.
Speaker 2 (12:26):
And turn pre josh was an actual.
Speaker 7 (12:31):
Both deeply unsatisfying it with dark matter in the from
the physics perspective, well, we.
Speaker 3 (12:37):
Don't know what it is.
Speaker 7 (12:39):
There were attempts to explain it away in various like
trying to hang on to the old way we think
about the world is full of stuff that we can
touch and see, but those never worked and there's just
too much of it. And then don't even give me
a start on dark energy, which is the opposite, right,
And so I worked for for someone Hopkins years ago
who for his PhD thesy it was told to confirm
(13:01):
other experiments to measure the size and shape of the
universe and part of that was weighing it. And so
he did that experiment using supernova, which is a different
way to do there's lots of with different ways to
do things. Got a negative number, super unsatisfying negative mass
density of the universe, which he immediately say like, okay,
well this was a waste. Why did I spend two
years doing this? Instead he ran with it and it
turned out it was super real and it got a
(13:21):
Nobel Prize from that outcome, which I'm not saying we'll
come from term premium. Well, but sometimes the deeply unsatisfying
thing is the more you dig into it, the more
it's real. And I think that any way you slice
that information, either literally asking people or trying to model
what the market's telling you in some super sophisticated way,
you always come up with a residual. Now, the question
(13:42):
is what is that term premium telling you? And can
you find consistent ways to measure it and track it?
And this positive and negative thing is clearly the case,
and you know there's different microeconomic ways to explain why
that should or should not be true. It really comes
down to uncertainty. So and is the uncertainty correlated with yields.
So if I don't know what's going to happen in
the future to the economy, is that uncertainly greater or
(14:04):
lesser when the rates go up or down and that
naturally generates these dislocations.
Speaker 2 (14:25):
Can you talk about the existence of something else, which
is bond vigilantes? So we just heard teleb talk about
the deficit, and yet I feel like the notion that
there are investors that you know, wake up one morning
and say, oh, wait, I'm really worried about the deficit.
Today's the day I'm gonna, you know, sell all my
bond exposure. That probably doesn't happen that often. And then secondly, Nelly,
(14:48):
I would be very interested in your take on this.
But you know, when you were at Treasury, did you
sit in the office going like, oh, the bond vigilantes
are going to get me. I better be disciplined with
my issuance schedule.
Speaker 3 (15:00):
Was that a question for everyone?
Speaker 6 (15:03):
Okay, Well, let me just no, I didn't sit there
with with that, And I was at the Fed for
thirty years before I went to Treasury. And you do
care a lot about bond fields. I mean, it's sort
of fundamental to the way monetary policy works. It's fundamental
to the way you issue treasure, but you don't think
about it on a daily basis, but it really influences
(15:25):
how you view events like these scarce events and if
these like you know, shocks that you weren't which by
definition you're not expecting. But if you've got a system
where there's a lot of leverage and you have an
unexpected shock, people are going to make trades and change
(15:47):
positions and that's when you worry. But it's not an
ongoing thing. So those kinds of to sort of prevent that,
you spend a lot of time as a policy maker,
where do we understand where the leverages and how can
we keep it manageable and make sure they can keep
their funding. This is goods to the point of funding
(16:07):
being you know, fundamental to being able to trade treasuries.
So it's kind of a bigger picture, but it's not
a daily thing. I don't know, but but it's important.
I actually think it's a really important market disciplining mechanism.
Speaker 5 (16:23):
Yeah, the level of debt matters, right, So the bod
fingilantees like, there's no group of people who get together
at a bar and say, hey, We're.
Speaker 3 (16:29):
Going to go sell treasures.
Speaker 5 (16:30):
Today's the day, Yeah, exactly, like hey, tomorrow, you know
the debt is going to be too big, Let's just
sell treasuries. The issue, I think is manifests itself in
multiple ways. And one is this this steepening of the yield.
Speaker 3 (16:43):
Curve that we've seen.
Speaker 5 (16:44):
Right in a normal environment, you'd expect that anyway if
the Fed Reserve was expected to cut rags, which it
certainly has. But at the same time, you know, you
do have a growing fear that when you have two
trillion two point five trillion dollar deficits every year and
we wind up in a a in a debt trap
where interest rates and the interest on the debt ends
(17:04):
up being so large that the fiscal agents in Washington
will have to do something about it. But the market
hasn't yet forced them into it. And I think that
that's that forcing the government to actually act and do
something is really what might have to be the impetus
for you to actually get some kind of fiscal response.
(17:25):
The challenge is political, right, and that is because fifty
plus percent of our debt is interesting of excuming of
our spending by the federal government is Medicare, social Security,
and interest on the debt. Well, those are hard things
to contend with, right, It's really really difficult.
Speaker 7 (17:45):
So I believe in bond vigilantes is not in a
US context. And what I mean by that is when
we talk about vigilantes, we're really referring to the nineties
EM crisis, where the concern was I'm not going to
get my dollar. There were dollar bonds. I'm not going
to get these dollars back because the party to this
debt doesn't have them and can't get them at a
reasonable price, and so the bond will default. And therefore
(18:05):
I want to get ahead of this default because you
know the classic bank run. I want to get out
before everyone else is before I'm stuck. In the US context,
you don't have that problem. So the question is who's
going to wake up and selling why?
Speaker 3 (18:16):
I'm saying why again.
Speaker 7 (18:18):
And they will sell because they are forced to sell.
And we've had the Repo vigilantes so to speak, strike
in twenty twenty and in twenty twenty five, and they
were forced to sell for a variety of reasons. One
was just the increase in the volatility market in general,
and then there were margin calls, especially in twenty twenty
where they were de levered, and the question then it
(18:39):
becomes like are we heading for that kind of scenario?
And the reason why the debt growth matters is because
these repo vigilantis are not worried about the credit.
Speaker 3 (18:48):
Of the bonds they hold.
Speaker 7 (18:49):
They're worried no one will buy them from them because
the banking system or the dealer of the bank affiliated
dealers that are to be supposed to be on the
other side of these trades won't have capacity, and every
trade's going to keep ticking cheaper and cheaper and cheaper,
and they're going to be in a difficult like sort
of mark to market situation. But that's a very different
set of considerations, and it's sort of related to overall
(19:10):
growth in the debt, but it's also related to the
structure of the market at how it places.
Speaker 4 (19:15):
Since we're here and we're just clarifying things for me
that I've always wanted to, you know, learn about for years,
over ten years of been sitting at my Bloomberg terminal.
Every once in a while you get a red headline
and it's talked about like bid to cover in the tail,
and I can never tell if any of these auction
statistics really make it difference, like oh, terrible auction and
(19:36):
there's always a good auction. How should I consume that information?
How useful is that or for whom is that useful?
Speaker 5 (19:43):
So so we actually started just earlier this year in
Bloomberg Intelligence having a grading methodology where we actually grade
these from DTA A plus, and you know, we look
at a variety of the bidding metrics in order to
do that and how they compare it to history. So
one of the big things that you've seen, and this
goes to Josh's issues about structure, you go back about
(20:07):
ten twelve years and you saw that primary dealers were
the biggest buyers of coon coupon debt. Today they're the smallest.
So you actually in the recent auctions, for example that
we just had this week with a seven year auction
earlier today, we had five year yesterday, the dealers only
bought about ten percent of the bonds, whereas if you
(20:29):
went back to twenty twelve twenty thirteen would have been
they would have bought forty to sixty percent of those auctions.
So the bidding metrics matter, and it matters because you
can see where the primary demand is coming from. And
we know now that you know, dealers, because of the
changes in market structure that have occurred, particularly since the
institution of Basil three, are much smaller buyers, and you know,
(20:53):
basically end users are much larger buyers, and some of
those are high frequency traders or maybe people who have
repo books and kind of need to fill them by
getting some collateral. Well, so all of those bidding metrics matter,
but the tails will show you that the market was
mispriced at the time that the auction closed versus what
(21:13):
the aggregate demand was at that auction. And that's that
tail is the single most important thing to look at,
followed by then some of the details in there about
who was actually purchasing, and then you know how much
they did for.
Speaker 2 (21:25):
So, since we brought up market structure, it is true
that the treasury market has experienced a number of volatility
events at this point, which is weird because in theory
it's supposed to be a pretty boring, kind of staid,
old fashioned market and it's been anything.
Speaker 3 (21:39):
But you're telling me that I've been boring.
Speaker 2 (21:41):
I'm so sorry.
Speaker 6 (21:42):
I'm so sorry.
Speaker 3 (21:43):
Well, not anymore. That's supposed to be.
Speaker 2 (21:46):
Supposed to be, and we have all these things that
have been put in place after every single volatility event,
like you know, the RRP of the standing repo facility.
We just had a change to the supplementary leverage ratio
to help dealer banks hold more treasuries. Why do we
still seem to have these all events happening.
Speaker 3 (22:08):
I guess we should have them sometimes.
Speaker 7 (22:10):
So the idea that treasury markets never had all events,
I mean, you go back to the nineties and their
massive all events in like two thousand and three is
a massive mortgage extension, there was a surprise seventy five basis.
Speaker 3 (22:19):
Point hike in the night. There's always been these events.
Speaker 7 (22:21):
I think the difference now is it's harder to pinpoint
a fundamental source. Like usually back then you could say, oh,
this was the GSEs, this was the FED hiking rates
in a way that people didn't expect. Now there's like
this whole process of trying to figure out why this
is happening, and it tends to happen very quickly, and
it tends to disrupt a lot of relationships. But like
(22:43):
I think, in one sense, this is stuff that's been
happening in the past, it's just the market is much larger,
the banking system's ability to provide that offset is.
Speaker 3 (22:53):
Is lesser, and the.
Speaker 7 (22:58):
Frequency with which trades happened it's just really gone up.
I mean, like the markets are very active now. But
I think that's all kind of a symptom of the issue,
which is it's kind of like a just in time
supply version of treasure markets, which is you have dealers
can't hold a lot of inventory, so they have the
match trades really efficiently. It used to be if you
didn't know the buyer and the seller, you just hold
it overnight. Now the high frequency traders do that for
(23:18):
them in a very efficient, fast paced way, and then
the dealers are trying to get hedge funds and set
through the price mechanism to hold inventory on their behalf
because basis trades are basically what dealers used to do,
and that's all very fragile, and so that combination of
things generates these shocks because the whole that arrangement.
Speaker 3 (23:35):
Can collapse very quickly. But you know, at the end
of the day, like the.
Speaker 7 (23:41):
Size of the market is growing faster than the dealers
have capacity to use.
Speaker 6 (23:46):
No, yeah, I just to provide like a policy maker's perspective,
like you just step back. There's just been so many
changes in technology and then the changes in the buyer base.
We talked about the structural change on who buys now
versus inn So like in twenty fourteen, there was something
called a flash rally and the treasury I remember that, remember,
(24:07):
and like no one understood why the treasury yield went
up and down like thirty basis points in two minutes
and reversed, and it was It kind of scared the
public sector, you know, the government officials like how is
this possible? What is the trade? And had to do
a lot with these new high frequency traders. It took
a lot of time to like dissect what happened. So
(24:30):
that was even before there was a lot of treasury debt.
Now we have more treasury debt and there's just you know,
the volume. But I guess I would also separate the
I would make a distinction between volatility events and then
market ill liquidity events, just because if the mark if
news is volatile, there's new changes in the economy, you
(24:52):
would expect treasury yields and prices to be volatile. They should,
They're supposed to reflect that, and I think lot of
what it's been happening recently. But the concerns are when
you can't transact easily and quickly because you've pulled in
more dealers that they have pulled in more than they
(25:14):
might normally would just because of the higher volatility. So
you should always get a little well, you should always
get a little less liquidity when things get all little,
you know, just because risk is higher. But it's when
they sort of stop making markets or stop posting or
something then and you can't actually transact. Those are the
things that the policymakers really care about.
Speaker 7 (25:37):
There's this balancing thing where we want treasure marks, we
deep in liquid. Deep in liquid means it's inexpensive to transact,
which means the dealers don't make much money per trade.
So the old joke like we're making losses, but we'll
make effort and volume kind of thing, and like hopefully
not that.
Speaker 3 (25:50):
But the.
Speaker 7 (25:52):
Response that if you want low transaction costs, the way
you get that, and so a functioning business is leverage.
And this has been the case for you know, seventy
five years since the Treasury fed a cord that this
was always the core issue. And so when you leverage
constrain banks, and even if the bank isn't leverage constrained,
when the desk is leverage constrained. When leverage is a
(26:13):
zero sum game within the institution, which is kind of
what these leverage ratios do. Everyone's fighting over the same
resource and that process introduces friction. And at the end
of the day, I think these all events are mostly
just time slippage. Like if you have to think about
things for too long, the market can run away from you.
So you know, in twenty twenty, if you had to
spend two days figuring out who gets incremental balance sheet,
a lot can happen in two days in March of
(26:34):
twenty twenty. And these very human experiences are kind of
a drive today.
Speaker 5 (26:40):
And we talked about this on the show that we
did back in late April, about the April event, and
that time slippage is exactly a big thing part of
what happened when right before you fell asleep on April ninth, Right,
it's because like, look, you can't call the New York
dealer desk to get more dealer balent sheet at eleven
(27:00):
thirty at night in New York time, and when you're
trading in Hong Kong, right' It's it's hard to do that.
So so you get these vol events that are create
a liquid markets, but only at certain points in time, right,
and then that always gets armed away.
Speaker 3 (27:16):
You know, people are are.
Speaker 5 (27:18):
You know at the end of the day where we're
definitely not price takers, right, there's a lot of people
who are you know, basically want the price of their
of the asset to reflect the risk that they're taking.
And so you're going to get these instantaneous shifts and
expectations when you get a news event, when you get
a headline from you know, Donald Trump, and you think
(27:39):
that maybe the dollar is not going to be the
reserve currency anymore. That's going to affect dollar assets regardless
of where they are in the world.
Speaker 2 (27:59):
This has been an another episode of the Authots podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 4 (28:04):
And I'm Jill Wisenthal. You can follow me at the Stalwart.
Follow our producers Carman Rodriguez at Carman armand dash Oll
Bennett at Dashbot and.
Speaker 3 (28:12):
Kill Brooks at Kilbrooks.
Speaker 4 (28:13):
For more Oddlots content, go to Bloomberg dot com slash
odd Lots where we have a daily newsletter and all
of our episodes, and you can chat about these topics
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Speaker 2 (28:26):
And if you enjoy Odd Lots, if you like it
when we do these live recordings, then please leave us
a positive review on your favorite podcast platform. Thanks for listening.
Speaker 1 (29:01):
Eight
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to a very special episode of the
au Thoughts podcast. I'm Tracy Alloway.
Speaker 3 (00:23):
And I'm Jill.
Speaker 4 (00:24):
Why isn't thal So what you are.
Speaker 2 (00:25):
About to hear has the very very modest title of
the best ever panel on the world's most important market,
that is the US Treasury market. Of course, this was
recorded live at our New York event on June twenty sixth.
Speaker 4 (00:40):
That's right. We had our recent oud Loots live event
in New York, and there's so much going on in
the treasury markets. There's questions about raids, there's questions about
foreign demand, there's questions about liquidity and the capacity of
existing treasury market infrastructure to handle all of the volume
of debt out there. So we wanted together some of
our favorite people to actually understand what's going on.
Speaker 2 (01:00):
Yep, who's going to buy all the bonds? And we
did it. Indeed, have an absolutely amazing panel. So we
had Nellie Lang, she is a senior fellow over at
the Brookings Institution. She is also the former Undersecretary of
the Treasury for Domestic Finance. We had Ira Jersey, who
you might remember from a previous episode. He is the
chief US interest rate strategist over at Bloomberg Intelligence. And finally,
(01:24):
we had an odd thoughts favorite Josh Younger. He is
a lecturer at Columbia University, among many other things. So
we hope you enjoy take a listen.
Speaker 4 (01:34):
So is anyone worried about who's going to buy the debt?
Speaker 3 (01:39):
Who goes first for that one? Well, I.
Speaker 5 (01:42):
Mean, I guess I'll start. I'm not worried about who's
going to buy the debt. You know, when we think
about markets generally, and especially markets for sovereign debt of
large countries that are relatively liquid, there will be a
buyer now the price might change, And I think that's
one of the things we have seen somewhat in recent weeks.
(02:03):
When you have somewhat of a slowing economy in the US,
you certainly see like two year yields have actually gone down,
you know, better part of fifty basis points over the
near term, but the long end hasn't done very much
at all. And I think that that is at least
in part and indication that there are some people who
are a little bit scared to buy that debt without
(02:23):
having some type of premium put onto it, so it'll
get bought.
Speaker 3 (02:27):
The question is at what price?
Speaker 5 (02:28):
And that's different, right, Like, I'm an investment strategist, I'm
not a policymaker, right, and I think that there's some
people who kind of mess that up with what like
our job is. When Nelly was at the Treasury Department,
she had a much different view of the world that
she had to do as opposed to what we do
as investors.
Speaker 2 (02:47):
Well, I mean, on that note, it is true that
we have more i would say, price sensitive buyers in
the market than we used to. Right, So, we used
to have a lot of central banks, a lot of
sovereign wealth funds. They're still there, but compared to stick buyers,
retail like that has grown a lot more. Nellie, does
that change the way you think about debt versus you
(03:07):
know some years.
Speaker 6 (03:08):
Ago absolutely so said prices will adjust, there will be
a buyer. But it used to be decades ago we
just had a much more stable investor base central banks,
foreign funds. Now it's like the non bank what we
would call the non bank financial institutions. It's hedge funds
(03:30):
for various reasons, private funds who use treasuries for liquidity
risk management. So the minute things get volatile, they'll want
to sell treasuries to help manage their own positions. And
so the investor base has changed. There will be buyers,
but it could change the price and change the way
(03:50):
prices fluctuate. You know, there just can be much more
volatility given the changing investor base. And that's something that Treasury,
who has to issue the debt regularly. We when I
was at Treasury, probably two hundred and fifty auctions a year.
They think about that, and it does affect how you
(04:10):
think about bills versus longer term coupons and all that.
Speaker 7 (04:15):
I guess I would it's definitely saying the same thing
I should start with. I thought i'd get away from
disclaimers when I left the FED, but I have to say, hey,
disclaimer which is this is not investment advice and place
that has lots of positions, and nothing I say should
implicate what positions we may have or not have that said,
I you know, I think it's a similar way to
(04:37):
ask the question is why are they buying the debt
because the market's going to clear the price. We may
or may not like that price, but prices used to
fluctuate like all over time for various reasons. I mean,
during the Civil War we had a captive demand base
because if you wanted to be a bank, you had
to buy treasuries, and yet the price moved right, And
so for me, it's are you buying a security to
hedge a liability that is of similar duration to the
(05:01):
thing you're buying. Are you in it for the long haul?
And classic examples like a life insurance company which has
very long term longevity indexed is the term of art, right,
It's like, as long as you people are alive, there's
going to be life insurance. For companies, they have to
buy debt of similar length and they're going to be
very stable. They might be price sensitive, but probably less so.
And at the end of the day, they have this
(05:21):
liability that has to get funded. Banks to the same
extent have these very long term liabilities deposits or long
term liabilities, as we talked about that on one of
the episodes. So they need long term assets to hedge
the long term liabilities. Because you have bank accounts, you
can get your money back whenever you want, but you
tend not to, right, So that's a long term liability.
A hedge fund is not in it for ten years,
because that is not the nature of the business. They
(05:44):
are responding to price signals and relative value. Treasury trading
is really just a response to price signals where the
market is attempting to find the lowest cost buyer. There's
this great book from the nineteenth century which is inspiration
for Freeman on that a Freeman Night. But like it's
an interesting story which called Feeding Paris, which is by
Bustiacht and a French economist, and he was saying, if
one person was responsible for feeding Paris, everyone would die,
(06:07):
because it's impossible feed a million people if you're making
all of these decisions on your own. So price signals
get the food to where it has to go when
it has to go there. And so like the miracle
of the price mechanism is the fact that Paris wakes
up every morning and has food eat. And it's still true, right,
I mean, cities are complicated, and so in the treasury
market case, the feeding Paris equivalent is basis trades and
(06:29):
swap spread trades and every instance of buying a security
with levered money, repo and things like that, and hedging
the risk with the derivative where the price difference between
those things makes that worthwhile. And that's also a signal
that we don't have enough of those liability hedgers who
are in it for the long haul. We have to
find somebody else.
Speaker 4 (06:48):
What are the data points we should be looking at,
because if I look at the ten year yield, you know,
it's something to do with the long term trajectory of
monetary policy, and that's going to fluctuate for various reasons
inflation growth, et cetera. If we want to capture some
of these other dynamics such as the change and who
are the buyers, or just the desire to even own
US dollar denominated debt assets, what should what else should
(07:12):
we be looking at?
Speaker 5 (07:13):
Well, So the way that I look at US treasuries,
assuming that there's not real credit risk, right, yeah, I would,
I would still I would still argue that there's still
not credit risk more than a couple of basis points
that's embedded in the current yield of say the ten
year treasury, then ten year treasuries.
Speaker 3 (07:30):
Again, the way that I look at it, it have to
be somewhere around nominal GDP growth.
Speaker 5 (07:34):
Right, So basically at the trajectory of what is the
growth rate of the country in the longer run, and
that's what the market is going to spit out, plus
or minus, like you said, some kind of liquidity or
either premium or discount. Now I would argue that with treasuries.
To Josh's point, right there is that markets that have
deep liquid funding markets, deep liquid derivatives markets, in order
(07:57):
for someone to hedge that risk, you tend to get
better outcomes and lower yields because of that. So you know,
we did a study I actually when I was back
at Credit Sueez, I did something actually for the for
a World Bank study about what is liquidity and just
about every single OECD government bond market in the world.
And what you determined is bid offers were tightest when
(08:19):
you had deep in liquid funding markets like repo and
when you had derivative markets. So you look at Italy
that basically didn't have a derivative market that was particularly
deep in liquid versus France, which did, and a Spain
that did. Actually, so Spanish spreads were actually tighter than
Italian spreads, not that the yield levels might have been
the same, righting, But the difference is those deep liquid
(08:43):
like ancillary markets around things matter, and that's where the
US is unlike any other country in the world, because
we have all of those things in abundance that very
few other markets have, you know, And I think that's
one reason why it's going to be difficult for people
not to be involved with treasuries, either as a liability
management tool or as a trading instrument.
Speaker 6 (09:05):
Uh well, oh, Mellie, please, I was just going to add,
I think just to emphasize, you know, it is long
term how to think about yield's long term nominal GDP growth,
but there's a lot of uncertainty about that growth and
that comes and you know, that fluctuates, and so if
you're uncertain about inflation, even if you have an expected
path of inflation, if it's high, it might be more volatile.
(09:28):
Or if you're uncertain about policies, any kind of policy
either you know, whether you're going to support the dollar
or you're going to support the US as a safe haven,
or you're going to support debt or try to reduce debt.
That adds uncertainty. So then treasury is you know, like
in long long run it is nominal GDP, but in
(09:49):
the meantime you're kind of going to fluctuate what these
we call premiums or discounts, you know, depending on how
much uncertainty there is about that. I tend to think
there's a fair amount of uncertainty about that. Right now.
Speaker 2 (10:00):
Can you convince Joe that there is such a thing
as the term premium?
Speaker 6 (10:06):
Well, yes, because so because if you define term premium
as the expectations hypothesis less, whatever the current yield is,
there's a residual, and that is a term premium. Then
you just try to define. You try to use things
you know about to explain the residual, but there's always
(10:28):
something left, and that, to me is a term premium empirically. Empirically,
I don't know if I'm going to convince you.
Speaker 5 (10:34):
I think I called it on Bloomberg Radio. Actually I
called it the dark matter of the treasury market. Right,
that term premium must exist. The question is do we
measure it properly?
Speaker 3 (10:45):
Right?
Speaker 5 (10:46):
And that's the art of it as opposed to the
science of term premium.
Speaker 7 (10:50):
So I like the easiest possible way to do this,
which is just to ask people what they think short
rates are going to be of a long run and
what long term rates are going to be tomorrow, and
the Philly Fad does this recorder and there is as
the Philly Fed. Okay, so they just ask economists to
make predictions as to what they think this that or
the other thing I'm going to do. And there's like
inflation and GDP growth and all these other things. But
(11:11):
once a year, I think the first quarter, so we
probably get that either now or soon. They ask tenure
average teable yields, and then they also ask about the
tenure yield, and so you're just literally asking people. There's
a lot of bells and whistles you can put on
these models, and some of the models with bells and
whistles incorporate the survey data. Some people just look only
at the survey data. Some people do just the modeling.
(11:31):
But in all these cases there's a residual doesn't mean
it's positive.
Speaker 3 (11:35):
Is the really key thing? Term premium can be negative.
Speaker 4 (11:39):
You can see why I'm unsatisfied.
Speaker 3 (11:41):
Yeah, like this is the thing is dark matter.
Speaker 4 (11:44):
They ask these surveys, yeah, which doesn't really like they
ask they ask a random survey. Sometimes it gains negative.
You can see why, Like I'm skeptical, Like, yeah, I'm
not totally satisfied by any of this.
Speaker 5 (11:56):
No, there's a difference between the two year yield and
the ten year yields, so therefore that difference also true.
Speaker 6 (12:02):
That could be the expectations of But you can write
down what you think or a survey of what you
think is between the two and ten and there's usually
a residual and can be positive or negative.
Speaker 3 (12:16):
And having got we can.
Speaker 6 (12:18):
Often be explained correlated with things like inflation, expectations.
Speaker 7 (12:22):
Or other kinds of uncertain I tell you from experience
with both dark matter.
Speaker 2 (12:26):
And turn pre josh was an actual.
Speaker 7 (12:31):
Both deeply unsatisfying it with dark matter in the from
the physics perspective, well, we.
Speaker 3 (12:37):
Don't know what it is.
Speaker 7 (12:39):
There were attempts to explain it away in various like
trying to hang on to the old way we think
about the world is full of stuff that we can
touch and see, but those never worked and there's just
too much of it. And then don't even give me
a start on dark energy, which is the opposite, right,
And so I worked for for someone Hopkins years ago
who for his PhD thesy it was told to confirm
(13:01):
other experiments to measure the size and shape of the
universe and part of that was weighing it. And so
he did that experiment using supernova, which is a different
way to do there's lots of with different ways to
do things. Got a negative number, super unsatisfying negative mass
density of the universe, which he immediately say like, okay,
well this was a waste. Why did I spend two
years doing this? Instead he ran with it and it
turned out it was super real and it got a
(13:21):
Nobel Prize from that outcome, which I'm not saying we'll
come from term premium. Well, but sometimes the deeply unsatisfying
thing is the more you dig into it, the more
it's real. And I think that any way you slice
that information, either literally asking people or trying to model
what the market's telling you in some super sophisticated way,
you always come up with a residual. Now, the question
(13:42):
is what is that term premium telling you? And can
you find consistent ways to measure it and track it?
And this positive and negative thing is clearly the case,
and you know there's different microeconomic ways to explain why
that should or should not be true. It really comes
down to uncertainty. So and is the uncertainty correlated with yields.
So if I don't know what's going to happen in
the future to the economy, is that uncertainly greater or
(14:04):
lesser when the rates go up or down and that
naturally generates these dislocations.
Speaker 2 (14:25):
Can you talk about the existence of something else, which
is bond vigilantes? So we just heard teleb talk about
the deficit, and yet I feel like the notion that
there are investors that you know, wake up one morning
and say, oh, wait, I'm really worried about the deficit.
Today's the day I'm gonna, you know, sell all my
bond exposure. That probably doesn't happen that often. And then secondly, Nelly,
(14:48):
I would be very interested in your take on this.
But you know, when you were at Treasury, did you
sit in the office going like, oh, the bond vigilantes
are going to get me. I better be disciplined with
my issuance schedule.
Speaker 3 (15:00):
Was that a question for everyone?
Speaker 6 (15:03):
Okay, Well, let me just no, I didn't sit there
with with that, And I was at the Fed for
thirty years before I went to Treasury. And you do
care a lot about bond fields. I mean, it's sort
of fundamental to the way monetary policy works. It's fundamental
to the way you issue treasure, but you don't think
about it on a daily basis, but it really influences
(15:25):
how you view events like these scarce events and if
these like you know, shocks that you weren't which by
definition you're not expecting. But if you've got a system
where there's a lot of leverage and you have an
unexpected shock, people are going to make trades and change
(15:47):
positions and that's when you worry. But it's not an
ongoing thing. So those kinds of to sort of prevent that,
you spend a lot of time as a policy maker,
where do we understand where the leverages and how can
we keep it manageable and make sure they can keep
their funding. This is goods to the point of funding
(16:07):
being you know, fundamental to being able to trade treasuries.
So it's kind of a bigger picture, but it's not
a daily thing. I don't know, but but it's important.
I actually think it's a really important market disciplining mechanism.
Speaker 5 (16:23):
Yeah, the level of debt matters, right, So the bod
fingilantees like, there's no group of people who get together
at a bar and say, hey, We're.
Speaker 3 (16:29):
Going to go sell treasures.
Speaker 5 (16:30):
Today's the day, Yeah, exactly, like hey, tomorrow, you know
the debt is going to be too big, Let's just
sell treasuries. The issue, I think is manifests itself in
multiple ways. And one is this this steepening of the yield.
Speaker 3 (16:43):
Curve that we've seen.
Speaker 5 (16:44):
Right in a normal environment, you'd expect that anyway if
the Fed Reserve was expected to cut rags, which it
certainly has. But at the same time, you know, you
do have a growing fear that when you have two
trillion two point five trillion dollar deficits every year and
we wind up in a a in a debt trap
where interest rates and the interest on the debt ends
(17:04):
up being so large that the fiscal agents in Washington
will have to do something about it. But the market
hasn't yet forced them into it. And I think that
that's that forcing the government to actually act and do
something is really what might have to be the impetus
for you to actually get some kind of fiscal response.
(17:25):
The challenge is political, right, and that is because fifty
plus percent of our debt is interesting of excuming of
our spending by the federal government is Medicare, social Security,
and interest on the debt. Well, those are hard things
to contend with, right, It's really really difficult.
Speaker 7 (17:45):
So I believe in bond vigilantes is not in a
US context. And what I mean by that is when
we talk about vigilantes, we're really referring to the nineties
EM crisis, where the concern was I'm not going to
get my dollar. There were dollar bonds. I'm not going
to get these dollars back because the party to this
debt doesn't have them and can't get them at a
reasonable price, and so the bond will default. And therefore
(18:05):
I want to get ahead of this default because you
know the classic bank run. I want to get out
before everyone else is before I'm stuck. In the US context,
you don't have that problem. So the question is who's
going to wake up and selling why?
Speaker 3 (18:16):
I'm saying why again.
Speaker 7 (18:18):
And they will sell because they are forced to sell.
And we've had the Repo vigilantes so to speak, strike
in twenty twenty and in twenty twenty five, and they
were forced to sell for a variety of reasons. One
was just the increase in the volatility market in general,
and then there were margin calls, especially in twenty twenty
where they were de levered, and the question then it
(18:39):
becomes like are we heading for that kind of scenario?
And the reason why the debt growth matters is because
these repo vigilantis are not worried about the credit.
Speaker 3 (18:48):
Of the bonds they hold.
Speaker 7 (18:49):
They're worried no one will buy them from them because
the banking system or the dealer of the bank affiliated
dealers that are to be supposed to be on the
other side of these trades won't have capacity, and every
trade's going to keep ticking cheaper and cheaper and cheaper,
and they're going to be in a difficult like sort
of mark to market situation. But that's a very different
set of considerations, and it's sort of related to overall
(19:10):
growth in the debt, but it's also related to the
structure of the market at how it places.
Speaker 4 (19:15):
Since we're here and we're just clarifying things for me
that I've always wanted to, you know, learn about for years,
over ten years of been sitting at my Bloomberg terminal.
Every once in a while you get a red headline
and it's talked about like bid to cover in the tail,
and I can never tell if any of these auction
statistics really make it difference, like oh, terrible auction and
(19:36):
there's always a good auction. How should I consume that information?
How useful is that or for whom is that useful?
Speaker 5 (19:43):
So so we actually started just earlier this year in
Bloomberg Intelligence having a grading methodology where we actually grade
these from DTA A plus, and you know, we look
at a variety of the bidding metrics in order to
do that and how they compare it to history. So
one of the big things that you've seen, and this
goes to Josh's issues about structure, you go back about
(20:07):
ten twelve years and you saw that primary dealers were
the biggest buyers of coon coupon debt. Today they're the smallest.
So you actually in the recent auctions, for example that
we just had this week with a seven year auction
earlier today, we had five year yesterday, the dealers only
bought about ten percent of the bonds, whereas if you
(20:29):
went back to twenty twelve twenty thirteen would have been
they would have bought forty to sixty percent of those auctions.
So the bidding metrics matter, and it matters because you
can see where the primary demand is coming from. And
we know now that you know, dealers, because of the
changes in market structure that have occurred, particularly since the
institution of Basil three, are much smaller buyers, and you know,
(20:53):
basically end users are much larger buyers, and some of
those are high frequency traders or maybe people who have
repo books and kind of need to fill them by
getting some collateral. Well, so all of those bidding metrics matter,
but the tails will show you that the market was
mispriced at the time that the auction closed versus what
(21:13):
the aggregate demand was at that auction. And that's that
tail is the single most important thing to look at,
followed by then some of the details in there about
who was actually purchasing, and then you know how much
they did for.
Speaker 2 (21:25):
So, since we brought up market structure, it is true
that the treasury market has experienced a number of volatility
events at this point, which is weird because in theory
it's supposed to be a pretty boring, kind of staid,
old fashioned market and it's been anything.
Speaker 3 (21:39):
But you're telling me that I've been boring.
Speaker 2 (21:41):
I'm so sorry.
Speaker 6 (21:42):
I'm so sorry.
Speaker 3 (21:43):
Well, not anymore. That's supposed to be.
Speaker 2 (21:46):
Supposed to be, and we have all these things that
have been put in place after every single volatility event,
like you know, the RRP of the standing repo facility.
We just had a change to the supplementary leverage ratio
to help dealer banks hold more treasuries. Why do we
still seem to have these all events happening.
Speaker 3 (22:08):
I guess we should have them sometimes.
Speaker 7 (22:10):
So the idea that treasury markets never had all events,
I mean, you go back to the nineties and their
massive all events in like two thousand and three is
a massive mortgage extension, there was a surprise seventy five basis.
Speaker 3 (22:19):
Point hike in the night. There's always been these events.
Speaker 7 (22:21):
I think the difference now is it's harder to pinpoint
a fundamental source. Like usually back then you could say, oh,
this was the GSEs, this was the FED hiking rates
in a way that people didn't expect. Now there's like
this whole process of trying to figure out why this
is happening, and it tends to happen very quickly, and
it tends to disrupt a lot of relationships. But like
(22:43):
I think, in one sense, this is stuff that's been
happening in the past, it's just the market is much larger,
the banking system's ability to provide that offset is.
Speaker 3 (22:53):
Is lesser, and the.
Speaker 7 (22:58):
Frequency with which trades happened it's just really gone up.
I mean, like the markets are very active now. But
I think that's all kind of a symptom of the issue,
which is it's kind of like a just in time
supply version of treasure markets, which is you have dealers
can't hold a lot of inventory, so they have the
match trades really efficiently. It used to be if you
didn't know the buyer and the seller, you just hold
it overnight. Now the high frequency traders do that for
(23:18):
them in a very efficient, fast paced way, and then
the dealers are trying to get hedge funds and set
through the price mechanism to hold inventory on their behalf
because basis trades are basically what dealers used to do,
and that's all very fragile, and so that combination of
things generates these shocks because the whole that arrangement.
Speaker 3 (23:35):
Can collapse very quickly. But you know, at the end
of the day, like the.
Speaker 7 (23:41):
Size of the market is growing faster than the dealers
have capacity to use.
Speaker 6 (23:46):
No, yeah, I just to provide like a policy maker's perspective,
like you just step back. There's just been so many
changes in technology and then the changes in the buyer base.
We talked about the structural change on who buys now
versus inn So like in twenty fourteen, there was something
called a flash rally and the treasury I remember that, remember,
(24:07):
and like no one understood why the treasury yield went
up and down like thirty basis points in two minutes
and reversed, and it was It kind of scared the
public sector, you know, the government officials like how is
this possible? What is the trade? And had to do
a lot with these new high frequency traders. It took
a lot of time to like dissect what happened. So
(24:30):
that was even before there was a lot of treasury debt.
Now we have more treasury debt and there's just you know,
the volume. But I guess I would also separate the
I would make a distinction between volatility events and then
market ill liquidity events, just because if the mark if
news is volatile, there's new changes in the economy, you
(24:52):
would expect treasury yields and prices to be volatile. They should,
They're supposed to reflect that, and I think lot of
what it's been happening recently. But the concerns are when
you can't transact easily and quickly because you've pulled in
more dealers that they have pulled in more than they
(25:14):
might normally would just because of the higher volatility. So
you should always get a little well, you should always
get a little less liquidity when things get all little,
you know, just because risk is higher. But it's when
they sort of stop making markets or stop posting or
something then and you can't actually transact. Those are the
things that the policymakers really care about.
Speaker 7 (25:37):
There's this balancing thing where we want treasure marks, we
deep in liquid. Deep in liquid means it's inexpensive to transact,
which means the dealers don't make much money per trade.
So the old joke like we're making losses, but we'll
make effort and volume kind of thing, and like hopefully
not that.
Speaker 3 (25:50):
But the.
Speaker 7 (25:52):
Response that if you want low transaction costs, the way
you get that, and so a functioning business is leverage.
And this has been the case for you know, seventy
five years since the Treasury fed a cord that this
was always the core issue. And so when you leverage
constrain banks, and even if the bank isn't leverage constrained,
when the desk is leverage constrained. When leverage is a
(26:13):
zero sum game within the institution, which is kind of
what these leverage ratios do. Everyone's fighting over the same
resource and that process introduces friction. And at the end
of the day, I think these all events are mostly
just time slippage. Like if you have to think about
things for too long, the market can run away from you.
So you know, in twenty twenty, if you had to
spend two days figuring out who gets incremental balance sheet,
a lot can happen in two days in March of
(26:34):
twenty twenty. And these very human experiences are kind of
a drive today.
Speaker 5 (26:40):
And we talked about this on the show that we
did back in late April, about the April event, and
that time slippage is exactly a big thing part of
what happened when right before you fell asleep on April ninth, Right,
it's because like, look, you can't call the New York
dealer desk to get more dealer balent sheet at eleven
(27:00):
thirty at night in New York time, and when you're
trading in Hong Kong, right' It's it's hard to do that.
So so you get these vol events that are create
a liquid markets, but only at certain points in time, right,
and then that always gets armed away.
Speaker 3 (27:16):
You know, people are are.
Speaker 5 (27:18):
You know at the end of the day where we're
definitely not price takers, right, there's a lot of people
who are you know, basically want the price of their
of the asset to reflect the risk that they're taking.
And so you're going to get these instantaneous shifts and
expectations when you get a news event, when you get
a headline from you know, Donald Trump, and you think
(27:39):
that maybe the dollar is not going to be the
reserve currency anymore. That's going to affect dollar assets regardless
of where they are in the world.
Speaker 2 (27:59):
This has been an another episode of the Authots podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 4 (28:04):
And I'm Jill Wisenthal. You can follow me at the Stalwart.
Follow our producers Carman Rodriguez at Carman armand dash Oll
Bennett at Dashbot and.
Speaker 3 (28:12):
Kill Brooks at Kilbrooks.
Speaker 4 (28:13):
For more Oddlots content, go to Bloomberg dot com slash
odd Lots where we have a daily newsletter and all
of our episodes, and you can chat about these topics
twenty four to seven in our discord discord dot gg
slash outlines.
Speaker 2 (28:26):
And if you enjoy Odd Lots, if you like it
when we do these live recordings, then please leave us
a positive review on your favorite podcast platform. Thanks for listening.
Speaker 1 (29:01):
Eight
Hosts And Creators
Joe Weisenthal
Tracy Alloway
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