April 28, 2025 • 43 mins
When stocks are plunging in a typical market environment, people reach for safe haven assets like US Treasuries. But we've seen that phenomenon break down more and more. It broke down in a sustained way during the intense inflation of 2022. And it's been breaking down again, in an acute way, since President Trump's so-called "Liberation Day." On the night of April 8 and early morning of April 9, we saw a major spike in yields. As Trump put it, the bond market was getting the "yips." But what was actually going on? Who was selling? And why? And what have we learned more broadly about technical and economic demand for US government debt? On this episode, we talked to Ira Jersey, the chief US interest rate strategist at Bloomberg Intelligence, for a crash course in what drives the bond market in both the short and long terms.
Read more:
The Bond Investors Who Got Trump to Pause His Tariffs
US Bonds Rally as Fed’s Hammack Revives Odds of a June Rate Cut
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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 another episode of the Out Thoughts podcast.
I'm Tracy Alloway and I'm Joe Wisenthal. Joe, one of
the struggles we're having right now is that so much
is happening, so much has been going on, that it's
hard enough to keep up with the immediate news, but
it's especially hard to stop and kind of ponder and
analyze what just happened. You sort of move on to
(00:41):
the next thing immediately, right.
Speaker 3 (00:44):
Well, I've always said hindsight is not twenty twenty because
we all disagree about things that have happened in the past.
Speaker 4 (00:49):
We know that all the time, So I've always hated
that cliche.
Speaker 3 (00:52):
But at least from the perspective of podcast co hosts,
talking about the past removes the risk to some extent
that the episode we're doing is completely.
Speaker 4 (01:04):
Normal immediately going to be out of it by the
time it's released.
Speaker 2 (01:06):
Yeah, this is true. Okay, So hopefully this episode will
still be relevant. I think it will be. We're going
to talk about what happened in the bond market basically
in April of twenty twenty five. I think that will
still be relevant. This was one of the biggest, most
dramatic things that happened in a market that, really, as
I like to say, is supposed to be pretty boring, right, Like,
(01:29):
people buy you as bonds because you want that little
bit of income. You want to know that you're getting
your money back, You want some certainty. People don't buy
it because it's moving around a lot on a day
to day basis. And yeah, that's exactly what we saw
happen in April post Trump's Liberation Day on April second,
So we should talk about.
Speaker 3 (01:49):
It totally, in particular the night of April ninth. Now,
the tenure yield actually peaked on April eleventh. We're recording
this April twenty fourth. The recent peak was April eleventh,
But April ninth I will never forget as the night
that I got zero sleep because I was just refreshing
my Bloomberg gap on the couch because I just was
watching this yield spike and everyone's like, it's China dumping. No,
(02:11):
it's Japan dumping. No, it's margin calls, and everyone's just
looking for cash. We need answers for what happened the
night of April eighth.
Speaker 2 (02:17):
This is already revisionist history, because you're on the record
saying that you did, in fact fall asleep on your couch,
and now you're saying you got no sleep.
Speaker 3 (02:25):
So it was late, and the peak was actually, I
don't know, somewhere in there whatever.
Speaker 2 (02:29):
Points still stands. Stuff was happening in the treasury market,
and there was a lot of discussion when it was
happening about what was going on. A lot of people
reaching for the old bond market boogeyman in the form
of the basis trade, and then a lot of people
talking about other things like maybe real money sellers who
just don't want to be as exposed to US debt
anymore because of all the uncertainty from Trump and his
(02:52):
tariff regime, et cetera. So we should talk about it.
Speaker 3 (02:55):
By the way, twelve ten a m. On the morning
of April ninth was that intermediate peak, So I think
I was still awake by then.
Speaker 2 (03:03):
Keep going, Okay, now that we've settled the most important
part of what happened on that particular day, we do,
in fact have the perfect guest. We're going to be
speaking with someone who we wanted to get on the
podcast for a really long time. And shame on us.
We didn't do it because he's here at Bloomberg and
he's sort of widely available, so we just kind of
(03:24):
kept putting it off. But now is the perfect time
to do this. So we're going to be speaking with
Ira Jersey. He is, of course, chief Global Interest rate
strategist for Bloomberg Intelligence, and I'm so glad we can
finally have him on to talk about everything that's been happening. Iira,
thank you so much for coming on on lots.
Speaker 5 (03:42):
Thanks very much for having me on. I have to
admit I am one episode behind, So don't talk about
your last episode with me, because I'll listen to that
on my way home today.
Speaker 2 (03:52):
You're saving it for later, Okay, we won't ruin the
plot of the latest episode. Okay, I guess just a
color question to start off with, But what have the
last few weeks been like for you? You know, you're
the chief rate strategist over at BI. There's been no
shortage of stuff to write and analyze at the moment.
How busy has it been and how dramatic is everything
(04:13):
against your previous experience in bonds?
Speaker 5 (04:16):
Yeah, so we've been talking about this, like, is this
the busiest couple of weeks that we've ever had, and
I would go back to the last time that was
something similar was the September October period of two thousand
and eight. For me, back in those days, I was
covering Fanny May and Freddie Mack and obviously they went
into conservatorship during that period. Then you had the whole
TARP failure where Congress didn't pass the rescue plan and
(04:38):
then finally they did, so there were you know, many
questions about the financial world back then. I think this
period is a little bit different in that we're talking
about and you've talked about this on the show already
over the last few weeks. This is a bit different
because you're talking about real economy issues as opposed to
financial economy issues. And because of that, people are wondering, like,
(04:59):
is there going to be a new world order? What
does it mean when you get you know, thirty basis
point spikes in the ten year yield on you know,
just one tweet. Does that mean that the dollar is
no longer going to be the reserve currency? These are
the questions that we continually get and it's difficult to
say at this point because we don't know what the
endgame is. But yeah, like you said, Tracy, there's absolutely
(05:19):
no lack of things to talk about.
Speaker 3 (05:21):
Why would you say this is more uncertain or busy
than COVID Because then we also saw this big liquidation
selling in treasuries, We saw an extraordinary effort by the
FED to come out and stabilize the bond market. What
is it that puts this more in the category of
the Great Financial Crisis rather than March twenty twenty.
Speaker 5 (05:42):
Well, I think in March twenty twenty, we all knew
that there was an issue, and the FED and other
fiscal agents acted very swiftly because everyone kind of knew
what the endgame was. We knew that we were going
to be shut down. We knew that we had to
figure out some way to live in a world where
everyone was at home. So I think that that the
fact that the endgame was kind of understood at the
(06:02):
time and policymakers acted very quickly because they knew what
the path would be if they didn't do anything. In
two thousand and eight, we knew that like, look, if
TARP didn't pass, what might have happened to the banking
sector At the time, you just had Leman go under.
You just had Fanny and Freddie go under. So and yes,
there was some policy response, but it wasn't enough, Like
(06:24):
the FED alone wasn't enough to get us out of
that particular situation. And I think here the issue that
we have today is there is and we always use
the term uncertainty, but I think we have to because
we don't know what the endgame ultimately is, right. We
don't know is is this the administration's way of getting
people to the table for things like defense burden sharing.
(06:46):
Is this the way that for them to get to
the table to isolate China? Is this the administration's way
of basically saying that, Hey, we don't know how to
cut the deficit, so let's focus on international because we
can do that. And that's in the president's purview as
opposed to something that Congress has to do. So I
think that there is a lot of right now uncertainty.
And I think the moves in the treasury market kind
(07:08):
of show the fragility of liquidity in the treasury market.
And there's a lot of reasons for that, and we
can get wonky. And I've talked about this for over
a dozen years since the Basil capital rule regulations went
into effect. But there are a lot of reasons to
think that we're going to continue to see these bouts
of volatility in the treasury market because of structural changes,
(07:29):
and when those structural changes come out like they did
the last few weeks, you do see these extreme volatility
events like we did on the seventh of April, Like
we did on the ninth of April.
Speaker 2 (07:40):
Well, okay, so since Joe brought up twenty twenty and
the response from the Fed back then, why don't we
go ahead and let's just talk about the basis change
because this was the initial thing that everyone kind of
reached for when we first started seeing these very extreme
moves in the bond market, and it's sort of the
bond market equivalent nowadays of you know how everyone says, oh, somewhere,
(08:02):
a macro pod is blowing up, right, or a pod shop.
What did I say, macropod multi strategy is blowing up? Yeah,
pod is blowing up somewhere. And I feel like people
start talking about the basis trade as soon as there's
some fall event in US treasuries nowadays. But what are
we discovering about the basis trade and its role in
the sell off a few weeks ago in the aftermath
(08:23):
and with some new numbers and information that's been coming out.
Speaker 5 (08:27):
Yeah, So firstly that the basis trade, if it was
the culprit, we didn't see it in the data almost
immediately because we would have seen things like a reduction
and open interest of treasury futures. It went down a
little right, open interest fell slightly, but it wasn't the
type of magnitude that was outside the normal daily volatility,
So it didn't seem to be that number two. You
(08:49):
would have seen the futures move significantly more in magnitude
against cash if it was the treasury futures basis. I
think that one of the reasons why many people focused
on this early on was it was something that the
Federal Reserve and some other policy makers were worried about
because they are very highly levered trades. But they have
to be. But why were these trades created? So these
(09:11):
trades are created because asset managers, in order to comply
with some of their own liquidity rules, end up having
a lot of cash on their balance sheet and to
make up for their duration gap to be closer to
the Bloomberg Aggregate Index or whatever their benchmark is, they
go out and buy futures on top of that cash
instead of buying an actual treasury security. What that means is,
(09:33):
because it's a future, there has to be a seller
for every buyer of a futures contract. So that leaves
others which has to be then levered investors or dealers
short treasury futures. Now, if you're short of treasury future
and you don't want to be short treasury future, you
don't want to be short treasuries, what do you do?
You have to hedge that somehow, And there's only realistically
(09:54):
two ways that people hedge. One is you can buy
a treasury or you can receive in an interest rate swap,
and that's what we call an invoice spread. So it's
futures versus swaps is called an invoice spread. We can
go back to the history of the nineteen eighties about
how that got its name, but I think that's unimportant
for this discussion. So what you did see during that
period of time was not so much the treasury futures
(10:17):
basis trade unwinding, but you saw the swap spread portion
of that trade unwinding. And that's one reason why everyone
talked about the treasury futures basis, but it really if
you looked at the price action, it was really the
swap market that was moving around ten basis points at
a clip, just on every single headline, every single tweet.
And I think that that's more reflective of the leverage
(10:39):
that was being unwound, was more in the over the
counter swap market as opposed to in the futures. Well,
I was about say, future's pits is not really pits anymore, but.
Speaker 4 (10:49):
We get it, we get it.
Speaker 2 (10:50):
So just on the swap spreads point, this was basically
the bank deregulation trade slash duration trade that a lot
of people put on posts Trump's win in November.
Speaker 5 (11:01):
That's my understanding, correct, Yeah, and we did too. So
after President Trump won, the expectation was that the enhanced
supplementary leverage ratio would be removed and that would allow
banks to own more treasuries. So therefore, if they could
own more treasuries instead of receiving and interest rate swaps
to get a little bit more duration to hedge other things,
(11:22):
they could buy treasuries out right instead. So most people,
both strategists as well as market participants were putting on
swapspread wideners. So swapspreads have been negative even when we
still have libor. So now we use something called SO
for the secured overnight financing rate, which is basically the
repurchase agreement market that's used as the underlying for these
interest rate swaps. It used to be libor. Even when
(11:42):
it was libor, swap spreads in the long end especially
were very negative, and the reason for that was the
new regulations that went into effect again, both dot frank
and some basle regulations, plus a very underappreciated part of
the market, which is insurance company regulations, which are often
regulated by states, not by the federal government. So when
(12:04):
states said, oh, you have to have a more diversified
portfolio of credits within your general account for life insurance
companies or p and C property and casualty insurers we
call them p and C insurres, they go out and say, okay,
we want to buy thirty year single a corporate debt. Well,
if you want to be diversified and be in one
(12:24):
hundred different names, there's not one hundred names that your
credit analysts are going to let you be in and
allow you to buy that issue thirty year debt. So
what happens is they end up having to buy ten
year debt or even five year debt in some cases,
and that leaves these insurance companies with this massive duration
gap because they have long term liabilities. Right life insurance
(12:45):
contracts are very long term liabilities. They need to hedge
that with having their own long term assets on their
balance sheet, and that ten year corporate doesn't meet that need.
So how then does an insurance company end up making
up that duration gap? And the answer is they receive
an interest rate swaps because it's capital efficient. When you
start an interest rate swap, your cost is zero as
(13:07):
opposed to going out and buying a treasury or even
buying a treasury strip, so as zero coupon long term
treasury we call them treasury strips. They don't want to
do that because it's not balance sheet efficient. So that's
kept swap spreads negative. But what kept swapsharp is even
more negative, was the fact that banks couldn't own enough
treasuries in order to kind of hedge their own short
exposure to interest rate swap. So it's underappreciated how much
(13:30):
bank and bank balance sheets really matter to the pricing
of a lot of these trades and security.
Speaker 4 (13:51):
First of all, I just think this is great, and.
Speaker 3 (13:52):
This is really clear as clear as these kind of
conversations can get.
Speaker 4 (13:56):
This is really helpful.
Speaker 5 (13:57):
You know.
Speaker 4 (13:57):
One of the things when people.
Speaker 3 (13:58):
Hear about these sort of like various trades that are
basis trade that are going on, they're like, oh, they're
leveraged sixty to one, and like, oh, they're just gambling.
And sometimes you hear about all the FED having to like,
you know, sort of stabilize the system. They're all these
regular speculators putting on insane leverage for picking up pennies
and now they're being backstopped. And what I like about
your explanation or your characterization is they're economic rationales for
(14:22):
this trade because it often gets flattened into speculation and
a casino. But various entities, whether it's the banks meeting
their regulatory obligations, the insurance companies are meeting their regulatory obligations,
there are real rationales for the existence of these markets
rooted in economics.
Speaker 2 (14:38):
Well, there's also a utility value, which is why arguably,
even though regulators are very aware of this you have
been worried about it, they haven't exactly done anything to
really like clamp down on it.
Speaker 5 (14:49):
No, totally.
Speaker 3 (14:49):
Like these markets serve economic purpose in a way that
sometimes I think doesn't come through. Let's go to the
night that I fell asleep on my couch.
Speaker 2 (14:59):
You know, there's the night that shall forever be known
as Joe falling asleep on his couch while looking.
Speaker 4 (15:04):
At Bloomberg charts that night.
Speaker 3 (15:06):
So when the market's selling off, when treasuries are selling
off intensely, you know, I think there's like various interpretations
or people have different ideas. So that's like, oh, it's
China getting revenge, or it's a steepener trade. There's going
to be more inflation in the future, and so the
path of interest rates is going to be higher than
(15:26):
we otherwise theod thought. And I'm a sort of strict
constructionist reader of the yield curve, so I always like that.
And then there's liquidation. Someone has to meet a margin
call somewhere, pay cash somewhere, and so they have to
sell their low liquidity treasuries to get a cash or whatever.
Speaker 4 (15:41):
What was I watching on the couch that night.
Speaker 5 (15:44):
Yeah, so I think there were a few things that
you were watching. One is you were looking at a
market that was very liquid. Keep in mind when you
fell asleep on your couch at midnight East Coast time. Yeah,
London was not yet open. Okay, so you were talking
about Tokyo and Hong Kong and Singapore were basically the
liquidity providers at the time in terms of dealer and
dealer desks, and they're going to be constrained. So even
(16:07):
if you only had a little tiny bit of selling
right in terms of volume, if it was all one
way at the same time, you probably had dealers that
weren't willing to take on that exposure at that moment.
And you'll notice on that day, like if you just
do an inter date chart and do a GP on
the tenure yield on the Bloomberg terminal.
Speaker 4 (16:26):
I've done it.
Speaker 5 (16:27):
Yeah, you can see as soon as London opened, the
market actually came back, and the market actually rallied a bit,
and there wasn't really any headlines at two am New
York time. But the fact is you had more liquidity.
So now you had some bottom fissures. Some people said, oh,
I can now buy a ten year bond two dollars
cheaper than I could last night, or when the market
closed yesterday, so you know, let's just cover a short
(16:49):
or just maybe take a little bit of a punt
and a long position. And then the market was still
very volatile after that. And I think part of the
reason it continued to be volatile was, besides the fact
that we had all of the tweets on again off
again tariff talk, is that people don't like to get
in front of volatility. And the fact is when volatility
is high, dealers tend to not only widen their bid offers,
(17:12):
but they also pull back. And another I think underappreciated
aspect of this too, and again I go back to
financial sector balance sheets. If you look at dealers, dealers
were as long treasuries going into this as they've ever been,
so they own more treasuries than ever in history. Now
part of that is because the treasuring market is bigger,
but a lot of these treasuries that they added they
(17:33):
added within the last six months. So this wasn't like
it wasn't like it turned on the dime, and it
wasn't very systemic. But the fact that there was a
lot of cash already on dealers balance sheets and still
is dealers are still very long cash bonds right now,
and again there are short futures on the other side
of that, It probably meant that they weren't able to
take on a lot more supply without getting approvals. Right,
(17:54):
you have to go to your risk manager and say, hey,
we'd like to make markets here, but we're fall like
can we make markets? So there are a certain amount
of regulatory arbitrage that you can't do today that you
were able to do prior to the Basle three capital
rules going into effect. It's what I call balance gad elasticity. Basically,
dealers don't have the same type of balance sheet elasticity
(18:16):
as they used to have prior to Basil two and
a half in Basil three rules.
Speaker 2 (18:19):
Right, So I hate this term. But people are asking
questions about what real money investors did in all of this,
and you know, money is money in my book. But
the idea of you know, I guess people that are
holding these things on a longer term basis these real
money investors. And this to me is actually like, this
is the scenario that could be more worrying than a
(18:41):
basis trade blow up, because like, okay, basis trades blow up,
the FED can basically come in and do something pretty
easily nowadays, and we're talking about a single levered trade
that's based on arbitraging, like a very technical relationship that's
blowing out, and so all of those positions are getting
changed very rapidly. But if we're talking about the collapse
(19:03):
of a real money investment in US debt because of
all this policy uncertainty and people wanting to I guess
dedollarize their balance sheets, that seems much more existential to me.
So what have you observed in the case of real
money investors?
Speaker 5 (19:19):
So it depends on how you define real money. So
I agree with you Tracy there. You know, you're talking
about central banks, sovereign wealth funds, action managers, you know,
pension funds and the like, right, so, and they all
have different economic reasons why they participate in the bond
market in general and the treasury market in particular. So
we can go through each of those very briefly. So first,
(19:40):
you know, it's not obvious to me that central banks
were selling. So this idea that you know, Joe brought
up some one of the things that people were saying,
that oh it's China selling.
Speaker 2 (19:49):
Kind of dumping treasury.
Speaker 5 (19:50):
Yeah, and the fact is is that And I'm not
going to talk specifically about China, but central banks in
general when they own treasuries for their reserve account. So
whether they own treasuries, or they own German boons, or
they own something in Sterling or Japanese government bonds, they
own short term securities. They don't go out and buy
tens and thirties because they don't want to take a
lot of price risk. They want to be able to
(20:12):
have their portfolio run off. And you've seen China do
this actually over the last ten years or so, reduce
their portfolio in order to defend their currency. And they
want to be able to do that very quickly without
moving the market a lot. And in order to do that,
you own short term debt. Now who does own the
long term debt? And we put out a chart about
this actually a couple of weeks ago, actually on the
eighth and most foreigners who own the long end are
(20:33):
private investors. So these are portfolio investors. These are pension funds,
insurance companies, and they own those because they can buy
treasuries and even after currency hedging, pick up yield compared
to their own home currency. So one of the perfect
examples of that is Taiwan. So taiwan Es insurance companies
will buy a lot of US debt, both corporates and treasuries,
(20:54):
and if they hedge it back, they still pick up
yield compared to the Taiwanese dollar debt. So they like
doing that trade, right, Why wouldn't you You pick up
yield and you get US treasury risk instead of time
on treasury risk. If you go to a central bank,
they won't be doing that, right. They'll go out and
they'll participate in three year auctions to your auctions. They'll
buy T bills and let that roll off. So the
(21:15):
price action that occurred during that period of time April
seventh to April eleventh didn't react like one would expect.
If you had central banks who were massive sellers of treasuries,
you would have expected to see the front end sell off.
But no, the front end rallied right, So you saw
lower yields in short term debt and higher yields and
long term debt. I think part of that was an
(21:35):
inflation trade. I think that a lot of people thought
and did think. And I was up late some of
those nights too, talking with clients in Asia and what
you heard from many of them is, isn't all of
this just inflationary? Because what Donald Trump and his administration
are doing is going to force us into recession or
he's going to fire Powell. And if he thought does that,
then interest rates are going to be too low, tariffs
(21:56):
are going to keep inflation higher. So that all was
a curve, and that's really the trade that you saw.
You saw that twist deepening of the yield curve.
Speaker 3 (22:05):
By the way, listeners, especially those who have come new
to odd Lots, either in recent weeks or recent years,
should really go back to I think it was twenty nineteen,
right Tracy with Brad Setzer, one of our legendary episodes
about Taiwan Life insurers and their voracious appetite for US
treasuries and the role that the Central Bank of the
Republic of China, which is Taiwan's central bank plays.
Speaker 2 (22:28):
The closest thing we've ever done to a true crime podcast.
Speaker 4 (22:31):
Yeah exactly. We're not alleging any crime, but it was.
Speaker 5 (22:36):
Misery.
Speaker 3 (22:36):
I had that sense of mystery when anyway, people should
go back to this one of the all.
Speaker 4 (22:40):
Time great episodes.
Speaker 3 (22:43):
Going back again the night of April eighth, this inflation
trade idea, I mean, because you mentioned and it was
very helpful that these were hours of low liquidity. London
hadn't opened yet, the dealer balance sheets are already priced
up to the gills, not really inclined to take on
treasuries in that moment. But it still raises the question
(23:03):
of the impetus for the selling by the marginal traders
at the time, why they were selling in the first place,
as opposed to buying safe haven asset, because that's often
what you do when the stock market is selling. Is
it essential? And it sort of sounded like in your
last answer that it was just a mini version of
that twenty twenty two dynamic where if you have bad
growth outcomes and sort of bad inflation outcomes, you sell
(23:27):
stocks and treasuries at the same time.
Speaker 5 (23:29):
Yeah, if that's if you're looking for a fundamental reason,
I would say that that would have been the fundamental impetus.
But I suspect much of it is just positioning. Like, okay,
I think what is underappreciated. You know, some people say
that this is just a cop out by you know,
some strategist who doesn't know what's going on, And I
can appreciate that a little bit, but positioning does matter.
So if there were people who were long treasuries in
(23:49):
Asia at Asia hours, like let's say that it's a
sovereign wealth fund or an asset manager in Hong Kong
or Singapore who was long ten year treasuries and thirty
year treasuries because they thought US was going to have
a recession and we were going to have lower interest
rates and all of that. And all of a sudden,
you hear everything coming out of New York. You wake
up in the morning and you say, maybe I have
(24:10):
too much risk on and then you try to take
off some of that risk in a market that's not
able to absorb that risk because dealer balance sheets are
completely anelastic the price then has to move pretty dramatically,
and you've seen that over different periods of time. Look,
the Treasury Department right now holds a conference every year
that I attend very regularly, not every year, but probably
(24:31):
two out of every three years about resilience of the
treasury market. And that all stemmed from about ten years ago.
We had the flash rally where US treasuries rallied fifty
basis points in fifteen minutes on no news right on nothing.
So why would that have happened. Well, it's because, well
the rumor was.
Speaker 2 (24:51):
That it was something happening, right, but no one was
ever able to prove it correct.
Speaker 5 (24:56):
Yeah, and look I met with the Treasury Department at
that time. I sat on a dealer and one of
the what was then one of the major treasury dealers,
and you know, nobody exactly knew what was going on,
but there was trading that was going on. It was
just a very small size. No one was willing to
take on, you know, basically short the market in a
very significant way. And this was in some ways just
(25:16):
the opposite of that. And as the treasury market's gotten bigger,
keep in mind the treasury market's nearly thirty trillion dollars
of marketable debt outstanding, of which about twenty three trillion
dollars is coupon, so not te bills. I always take
T bills out of this equation, by the way, because
when people say, oh, there's this wall of debt that
has to be refinanced this year, the fact is seven
trillion of that or near seven trillion of that is
(25:37):
treasury bills.
Speaker 4 (25:38):
That's good to know.
Speaker 5 (25:39):
And with two A seven money market funds having seven
trillion dollars and only allowed to buy treasuries or do
treasury repurchase agreements, they're not a rollover risk. So take
take T bills out of the equation, because the reason
why Treasury issues all those tea bills is because that's
where demand is. They would issue less if there was
less demand. But there is a significant amount of treasuries
(26:00):
that need to be rolled over every year. Right There's
you know, half a trillion dollars to a trillion dollars
every year of coupons that mature need to be rolled
over just about every quarter. So when you're in a
situation like that and you're treasury dealer and you have
to bid at these auctions, you have to save some room,
and you can't always be full on treasuries, and you
don't want to get full on treasuries at midnight. If
(26:22):
you're again like one of the bulch bracket banks and
the overnight trader in Hong Kong, the last thing you
want to do is get a tap on your shoulder
from a risk manager and have that risk manager say
to you, hey, you broke your budget. You know the
door's over there. So there's career risk involved in all
of this as well, which I think is also a
second thing that's underappreciated is just mentality of trading desks
(26:43):
is meaningfully different than it was again before Basle, because
risk managers run the market now, not traders, and I
think that that's also something else that's underappreciated by a
lot of people.
Speaker 2 (27:08):
I take the point about career risk and dealer capacity
for risk being more constrained than it was pre some
of the Basil rules, but it does strike me just
getting back to the sort of existential angst when it
comes to demand for US treasuries. We have seen some
figures that suggest that we just saw, you know, like
run of the mill selling of US treasury. So for instance,
(27:32):
we had Japan's Ministry of Finance showing that private investors
in the country sold like seventeen point five billion in
long term bonds in the week this was ended April fourth.
I actually needed to go and look at what the
week after happened. But even before then, Japan's private sellers
they sold a bunch of US bonds, like literally right
(27:53):
before early November when we had the election, And if
we look at some of the commentary we've seen from
analysts over the years, there's a lot of discussion of
a lack of structural demand for US treasuries, especially overseas. Right, Like,
some of the foreign buyers that were buying US debt
a decade or two decades or three decades ago just
(28:15):
aren't buying as much of it as they used to
talk to us about. Like the I guess long term
outlook for US treasury demand, where is that going to
be coming from? And how true is it that we
have seen a bit of a rebalancing from foreign to
domestic sources.
Speaker 5 (28:33):
Well, we certainly have seen a massive shift away from
Keep in mind about ten years ago, and I can
get the exact number later, but about ten years ago,
about half of US debt was owned by foreigners. Now again,
most of that was it was split out pretty evenly
between central banks and private investors in terms of the
(28:54):
risk that they owned. And we talk about risk, not
necessarily the notional value, because we care about you know,
who's buying the riskier parts of the market. So ten
years and thirty year debt, for example, you can buy
a little bit of that and effectively buy a lot
of risk the central banks have certainly been diversifying their portfolios,
and I think that this makes a lot of sense.
(29:16):
Right if you were a central bank and you said
fifteen years ago, you said, oh, ninety plus percent of
our foreign exchange reserves are all in US dollars, but
we only do fifty percent of our business our trade
in the US dollar. We do a lot in euros,
and we do a lot in yen, right, so we
want to diversify our foreign exchange holdings. That's something that
(29:37):
has been going on for better part of a decade,
and in fact, aggregate ownership of US treasuries has actually
kind of been flatlined, and as a share of the market,
it's gone way down now. But who's replaced that we
have to keep it To keep this in mind too,
and this is to your point, Tracy, I think, is
like who's going to be the incremental buyer? Because the
Fed now owns a lot more treasuries than they did, right,
(29:58):
because they did quantitative ease for the better part of
three years and they purchased a significant share of the market.
Now they don't own an unusually high share of the market,
but in notional terms, it's a very large share. So
the FED usually owns around twenty percent of the treasury
market and has basically since the nineteen sixties, Right, It's
always owned about twenty percent of the market, But now
(30:20):
the market is so massive, and they were really a
very large non economic buyer of treasuries that they're hard
to replace in the market without their being additional. You know,
I don't love the concept of term premium the way
that we measure it, but there is term premium right
in the market, and at some point, term premium has
to go up if you are not sure where demand
(30:42):
is going to come from from these longer duration assets,
and by doing what President Trump's doing, there is a
fear out there. And I've spoken to a lot of
investors both here in the US and overseas about is
there going to be significant demand for treasuries if, say
to Trump administration's able to get our trade better in
line the buying of treasuries that you saw back in
(31:04):
the early two thousands and right after the global financial
crisis that also coincided with a massive increase to the
US current account deficit, So we were effectively exporting a
whole lot of dollars, and as we're exporting those dollars,
the financial account has to balance, So one of two
things has to happen. Either people sell the dollar and
then buy their home currency. Therefore their own currency winds
(31:26):
up appreciating versus a dollar, and that makes them less competitive,
and I think that's kind of what President Trump seems
to want to do at least as one of the
outcomes of all of this tariff negotiation and trade negotiation.
Or you have to go out and buy a US
dollar denominated asset. Now that could be a hard asset,
it could be corporates, it could be but treasuries are
the thing that most countries want to own because it's liquid.
(31:49):
You buy short term treasuries and you kind of know
you're going to get your money back. You also know
that you could replace them very easily because there's auctions
every single month. So there's a whole reason why you
would want to own treasuries. When the current account bounce
is massive, go back and just you know, you can
go on the Bloomberg terminal or go on go on
to our Bloomberg Intelligence dashboard bi rates and you can
(32:12):
look at just how much foreigners bought of US debt
as the current account deficit went up as a current
account deficit got better. In the second half of the
twenty teens, you saw that there was significant slowing of
what foreigners were buying of US dollars because they just
didn't need to. They had other alternatives and they and
the current account deficit was significantly lower.
Speaker 4 (32:33):
So I just have one last question.
Speaker 3 (32:34):
I mean, first of all, when it comes to who
is going to own US treasuries. A. I hear that
there's a big tax cut plan that's in the works
in DC, So that's one pocket of people having more
cash and theoretically marginal buyers. B. You know, you're talking
about closing the trade deficit. In theory, the only way
we really closed the trade deficit is with a significant
(32:56):
fiscal tightening, and so therefore you just have less debt
to sell. But just on the my last question is,
you know, Tracy and I are on opposite sides of this,
the term premium question. I am yet to convinced be
that it's a useful concept. I like, the old curve
is the old curve, it's the what.
Speaker 4 (33:13):
It sounds like. You're somewhere in the middle.
Speaker 3 (33:15):
So settle at least the IRA Jersey verdict on how
we should think about the usefulness or the usefulness of
measuring this thing called the term premium.
Speaker 5 (33:25):
So the term premium exists. It must exist. But I
called it the dark matter before some members of the
Federal Reserve called it the dark matter of the treasury market.
Term premium has to exist because you have to be
compensated for risks outside of what the Federal Reserve is
going to do. And the greater the uncertainty, the greater
the term premium should be. The farther you go out
(33:46):
the curve. And that's one of the reasons why the
yield curve generally is upward sloping. Right, not always, but
generally it's upward sloping because of the uncertainty about the
future path of interest rates, and there's you know, there
is probably a little tiny bit of credit premium in
that term premium, but really it's a risk premium for
the unknown going forward. So term premium exists. I think
(34:07):
I don't love some of the models and the way
that we actually try to determine term premium. So the
FED has several different models, like the Adrian Crump model,
for example, which attempt to quantify what the term premium
is at any given moment. I like things that you
can trade, because that's our job. And the problem is
that if you tried to use the fed's models for
(34:28):
term premium and said, oh, this looks like it's too
steep or too flat, and you did those trades, you'd
lose more than half the time. So they're not particularly
good predictors of is the market rich or cheap? And
as investors, that's our job. So they might be interesting
on an academic basis, but if I can't trade it,
I don't care about it. And that's why generally speaking,
I look at the yield curve. I do have my own.
(34:51):
It's more of a fair value model for the yield
curve as opposed to a term premium model, but it
has a similar effect. But you can determine are we
rich or cheap given the variety of outcomes from both
the FED reserve and also supply and other inputs that
we use for those models.
Speaker 2 (35:07):
Joe, you should just admit you were wrong about the
term premium because we started arguing about this late last
year early this year when the term premium was going
up a lot, and you thought it was all about
Fed expectations, and now now here we are and it's
still going up.
Speaker 3 (35:22):
I have to admit something that A is completely not
useful for trading, and B only exists because it theoretically
has to exist in this world, but we can't observe it.
Speaker 4 (35:32):
Fine, I'll admit it.
Speaker 5 (35:33):
Fine.
Speaker 2 (35:34):
Oh Mike, Okay, Wait, speaking of something else that Joe
was wrong about. Can we talk about bond market vigilantes
for a second. So I think there was this expectation
going into twenty twenty five and the new Trump administration
that he was going to be all about stock prices,
and you know, he talked a lot about stock markets
going up in his first presidency. He kind of suggested
(35:55):
he wanted stocks to go up in his second presidency,
and then we saw the big market crash. But you know,
looking back on it, it kind of feels like bonds
were the pressure point for him when it comes to
ratcheting back some of the tariff tenshion. What's the role
of the bond market, I guess when it comes to
influencing the new Trump administration.
Speaker 5 (36:18):
I wish we had any real good color about that,
because that would be very helpful for analyzing what's going
to come next. I think it matters in many respects.
In particular, remember they said that, hey, they really want
to try to get the ten year treasury yield down.
When Treasury's rallied for the month of February and early March,
remember President Trump said, oh, look, interest rates are lower. Now,
(36:39):
that's what we're trying to do. Of course, we've sold
off since then in March, part because of this risk
premium that we're talking about, as well as some of
the structural issues that we discussed earlier in the show.
I think it matters because, look, the fact is, even
if the President is able to find half a trillion
dollars in savings and that sounds so weird to say
half a tree brillion and still not being big enough
(37:02):
to kind of matter, you're still going to have trillion
dollar deficits that need to be funded, not to mention
rolling over the existing debt that's going to be maturing.
And as that occurs, you know, you want to get
the lowest borrowing costs for the taxpayer. So I understand
that President Trump really would like to see lower tenure yields.
But one way to do that is to actually issue
less ten year bonds, right, that's one way, But you
(37:24):
can't do that unless you really significantly decrease the deficit
and actually even maybe balance the budget, right, because you're
going to be issuing more and more. In fact, we're
coming out with our Treasury Funding report probably right around
the time that a lot of people listening to this on.
It'll be on the twenty fifth of April, and next Wednesday,
the Treasury Department will decide and Scott Bessen and his
(37:47):
appointees will decide how they're going to fund the deficit.
And they're still going to be nearly a two trillion
dollar deficit this year, and he's going to have to
issue ten year treasuries. So I think that if there's
not demand from overseas, investors lose faith in the US
government and its ability to continue to finance the debt.
(38:07):
That has to worry at any administration, regardless of whether
it's President Trump or President Biden or whomever.
Speaker 2 (38:13):
All Right, Ira, this is what we call a deliciously
information data dense episode. So thank you so much for
coming on. All thoughts, I'm so glad we could finally
get you on the show, particularly at this exact moment
in time.
Speaker 3 (38:27):
And thank you so much for taking my side and
saying I was correct on the term premium. I really
appreciate you coming on offline lies Lies.
Speaker 5 (38:34):
Absolutely happy to be here.
Speaker 4 (38:47):
That's what I heard, Tracy. Didn't you say I was correct?
Speaker 2 (38:50):
No, you both were wrong. You both said it was
fed expectations at the time, I was the only one
who was right. That was a great conversation. And there's
a lot of technicality in all of this, but like
part of the story, as Ira was highlighting, is the
technicalities of like the structure of the US bond market.
Speaker 5 (39:08):
Right.
Speaker 3 (39:08):
This is where we certainly agree, which is that it's
not always a fudge factor when people talk about technical
aspects or positioning. I think we both completely agree on this.
And you can especially that stuff about like just you know,
the idea of dealers in Asia and why for various
regulatory reasons and other trade reasons they had all these
(39:29):
what their balance sheets were. I love that idea that
like it's the risk managers, not the risk takers, driving
the market.
Speaker 4 (39:35):
Very useful conversation.
Speaker 5 (39:37):
On that front.
Speaker 2 (39:37):
Yeah, But that said, I mean, I think there are
still some longer term like changes in structural demand for
US treasuries. You know, you can go back to reports
that were published by like it might even have been
Josh Younger at JP Morgan a few years ago about
you know, JP Morgan is worried about who's going to
buy all the US bonds because we have seen that
(39:58):
structural retreat in receives demand. And if we think about
what Trump is trying to do right now in terms
of rebalancing global trade and reducing the US trade deficit,
it does seem like one of the outcomes of that
is structurally less demand for US treasury.
Speaker 3 (40:16):
Well, one thing that's really interesting. We're so we're all
recording this April twenty fourth, and right now the stock
market is flying today, and actually it's really not that
far below now. At last I looked, it was only
three and a half percent below where it was on
Liberation Day. But we are very close still to the
bottom of the recent range in the dollar. And so
(40:36):
one way that that sort of retreat from America trade
expresses itself, in my mind, is not necessarily through the
price of the curve or anything, but just the fact
that like relative to the rest of the world, the
dollar is less appealing. On one other thing, I just
want to get in on the question of the treasury
market's influence on the government. I certainly one hundred percent
agree with you that the government clearly while it's lower
(41:00):
and it doesn't like higher yields for all kinds of it.
They've said it, they've said it's God best and has
said it. The only reason I don't like the term
dollar vigilantes is I bon bond vigilantes is that it
prescribes a level of sort of like agency that I
don't think is helpful. O.
Speaker 2 (41:16):
Sure, we know, like there was not a single market.
Speaker 3 (41:20):
Why I don't like it as a descriptive frames.
Speaker 2 (41:24):
Look, we're talking about complicated concepts. I think you have
to have some shorthand here, and I do think, you know, like,
looking at what happened, it does seem like the administration
at a minimum, you can say they seem to care
about rates, which means they care about what bond investors
are doing. I would like it if there was like
an actual bond vigilante who you could, like, you know,
(41:46):
you could flash one of those like Batman signals in
the sky for the bond vigilante and they would all
come out and start selling you as treasuries and affect
change in certain policies that would be interesting anyway, shall
we leave it there?
Speaker 4 (41:59):
Let's save it there.
Speaker 2 (42:00):
This has been another episode of the aud Loots podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3 (42:05):
And I'm Joe Wisenthal. You can follow me at the Stalwart.
Follow Ira Jersey. He's at Ira f Jersey. Follow our
producers Kerman Rodriguez at Kerman Erman, Dashel Bennett at dashbod
and Kele Brooks and Kale Brooks. For more odd Laws content,
go to Bloomberg dot com slash odd Lots, where we
have a daily newsletter and all of our episodes, and
you can chet about all of these topics twenty four
(42:27):
to seven in our discord with fellow listeners Discord dot
gg slash od Lots.
Speaker 2 (42:32):
And if you enjoy odd Lots, if you like it
when Joe and I argue about the existence of the
term premium, then please leave us a positive review on
your favorite podcast platform. And remember, if you are a
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Thanks for listening in
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Out Thoughts podcast.
I'm Tracy Alloway and I'm Joe Wisenthal. Joe, one of
the struggles we're having right now is that so much
is happening, so much has been going on, that it's
hard enough to keep up with the immediate news, but
it's especially hard to stop and kind of ponder and
analyze what just happened. You sort of move on to
(00:41):
the next thing immediately, right.
Speaker 3 (00:44):
Well, I've always said hindsight is not twenty twenty because
we all disagree about things that have happened in the past.
Speaker 4 (00:49):
We know that all the time, So I've always hated
that cliche.
Speaker 3 (00:52):
But at least from the perspective of podcast co hosts,
talking about the past removes the risk to some extent
that the episode we're doing is completely.
Speaker 4 (01:04):
Normal immediately going to be out of it by the
time it's released.
Speaker 2 (01:06):
Yeah, this is true. Okay, So hopefully this episode will
still be relevant. I think it will be. We're going
to talk about what happened in the bond market basically
in April of twenty twenty five. I think that will
still be relevant. This was one of the biggest, most
dramatic things that happened in a market that, really, as
I like to say, is supposed to be pretty boring, right, Like,
(01:29):
people buy you as bonds because you want that little
bit of income. You want to know that you're getting
your money back, You want some certainty. People don't buy
it because it's moving around a lot on a day
to day basis. And yeah, that's exactly what we saw
happen in April post Trump's Liberation Day on April second,
So we should talk about.
Speaker 3 (01:49):
It totally, in particular the night of April ninth. Now,
the tenure yield actually peaked on April eleventh. We're recording
this April twenty fourth. The recent peak was April eleventh,
But April ninth I will never forget as the night
that I got zero sleep because I was just refreshing
my Bloomberg gap on the couch because I just was
watching this yield spike and everyone's like, it's China dumping. No,
(02:11):
it's Japan dumping. No, it's margin calls, and everyone's just
looking for cash. We need answers for what happened the
night of April eighth.
Speaker 2 (02:17):
This is already revisionist history, because you're on the record
saying that you did, in fact fall asleep on your couch,
and now you're saying you got no sleep.
Speaker 3 (02:25):
So it was late, and the peak was actually, I
don't know, somewhere in there whatever.
Speaker 2 (02:29):
Points still stands. Stuff was happening in the treasury market,
and there was a lot of discussion when it was
happening about what was going on. A lot of people
reaching for the old bond market boogeyman in the form
of the basis trade, and then a lot of people
talking about other things like maybe real money sellers who
just don't want to be as exposed to US debt
anymore because of all the uncertainty from Trump and his
(02:52):
tariff regime, et cetera. So we should talk about it.
Speaker 3 (02:55):
By the way, twelve ten a m. On the morning
of April ninth was that intermediate peak, So I think
I was still awake by then.
Speaker 2 (03:03):
Keep going, Okay, now that we've settled the most important
part of what happened on that particular day, we do,
in fact have the perfect guest. We're going to be
speaking with someone who we wanted to get on the
podcast for a really long time. And shame on us.
We didn't do it because he's here at Bloomberg and
he's sort of widely available, so we just kind of
(03:24):
kept putting it off. But now is the perfect time
to do this. So we're going to be speaking with
Ira Jersey. He is, of course, chief Global Interest rate
strategist for Bloomberg Intelligence, and I'm so glad we can
finally have him on to talk about everything that's been happening. Iira,
thank you so much for coming on on lots.
Speaker 5 (03:42):
Thanks very much for having me on. I have to
admit I am one episode behind, So don't talk about
your last episode with me, because I'll listen to that
on my way home today.
Speaker 2 (03:52):
You're saving it for later, Okay, we won't ruin the
plot of the latest episode. Okay, I guess just a
color question to start off with, But what have the
last few weeks been like for you? You know, you're
the chief rate strategist over at BI. There's been no
shortage of stuff to write and analyze at the moment.
How busy has it been and how dramatic is everything
(04:13):
against your previous experience in bonds?
Speaker 5 (04:16):
Yeah, so we've been talking about this, like, is this
the busiest couple of weeks that we've ever had, and
I would go back to the last time that was
something similar was the September October period of two thousand
and eight. For me, back in those days, I was
covering Fanny May and Freddie Mack and obviously they went
into conservatorship during that period. Then you had the whole
TARP failure where Congress didn't pass the rescue plan and
(04:38):
then finally they did, so there were you know, many
questions about the financial world back then. I think this
period is a little bit different in that we're talking
about and you've talked about this on the show already
over the last few weeks. This is a bit different
because you're talking about real economy issues as opposed to
financial economy issues. And because of that, people are wondering, like,
(04:59):
is there going to be a new world order? What
does it mean when you get you know, thirty basis
point spikes in the ten year yield on you know,
just one tweet. Does that mean that the dollar is
no longer going to be the reserve currency? These are
the questions that we continually get and it's difficult to
say at this point because we don't know what the
endgame is. But yeah, like you said, Tracy, there's absolutely
(05:19):
no lack of things to talk about.
Speaker 3 (05:21):
Why would you say this is more uncertain or busy
than COVID Because then we also saw this big liquidation
selling in treasuries, We saw an extraordinary effort by the
FED to come out and stabilize the bond market. What
is it that puts this more in the category of
the Great Financial Crisis rather than March twenty twenty.
Speaker 5 (05:42):
Well, I think in March twenty twenty, we all knew
that there was an issue, and the FED and other
fiscal agents acted very swiftly because everyone kind of knew
what the endgame was. We knew that we were going
to be shut down. We knew that we had to
figure out some way to live in a world where
everyone was at home. So I think that that the
fact that the endgame was kind of understood at the
(06:02):
time and policymakers acted very quickly because they knew what
the path would be if they didn't do anything. In
two thousand and eight, we knew that like, look, if
TARP didn't pass, what might have happened to the banking
sector At the time, you just had Leman go under.
You just had Fanny and Freddie go under. So and yes,
there was some policy response, but it wasn't enough, Like
(06:24):
the FED alone wasn't enough to get us out of
that particular situation. And I think here the issue that
we have today is there is and we always use
the term uncertainty, but I think we have to because
we don't know what the endgame ultimately is, right. We
don't know is is this the administration's way of getting
people to the table for things like defense burden sharing.
(06:46):
Is this the way that for them to get to
the table to isolate China? Is this the administration's way
of basically saying that, Hey, we don't know how to
cut the deficit, so let's focus on international because we
can do that. And that's in the president's purview as
opposed to something that Congress has to do. So I
think that there is a lot of right now uncertainty.
And I think the moves in the treasury market kind
(07:08):
of show the fragility of liquidity in the treasury market.
And there's a lot of reasons for that, and we
can get wonky. And I've talked about this for over
a dozen years since the Basil capital rule regulations went
into effect. But there are a lot of reasons to
think that we're going to continue to see these bouts
of volatility in the treasury market because of structural changes,
(07:29):
and when those structural changes come out like they did
the last few weeks, you do see these extreme volatility
events like we did on the seventh of April, Like
we did on the ninth of April.
Speaker 2 (07:40):
Well, okay, so since Joe brought up twenty twenty and
the response from the Fed back then, why don't we
go ahead and let's just talk about the basis change
because this was the initial thing that everyone kind of
reached for when we first started seeing these very extreme
moves in the bond market, and it's sort of the
bond market equivalent nowadays of you know how everyone says, oh, somewhere,
(08:02):
a macro pod is blowing up, right, or a pod shop.
What did I say, macropod multi strategy is blowing up? Yeah,
pod is blowing up somewhere. And I feel like people
start talking about the basis trade as soon as there's
some fall event in US treasuries nowadays. But what are
we discovering about the basis trade and its role in
the sell off a few weeks ago in the aftermath
(08:23):
and with some new numbers and information that's been coming out.
Speaker 5 (08:27):
Yeah, So firstly that the basis trade, if it was
the culprit, we didn't see it in the data almost
immediately because we would have seen things like a reduction
and open interest of treasury futures. It went down a
little right, open interest fell slightly, but it wasn't the
type of magnitude that was outside the normal daily volatility,
So it didn't seem to be that number two. You
(08:49):
would have seen the futures move significantly more in magnitude
against cash if it was the treasury futures basis. I
think that one of the reasons why many people focused
on this early on was it was something that the
Federal Reserve and some other policy makers were worried about
because they are very highly levered trades. But they have
to be. But why were these trades created? So these
(09:11):
trades are created because asset managers, in order to comply
with some of their own liquidity rules, end up having
a lot of cash on their balance sheet and to
make up for their duration gap to be closer to
the Bloomberg Aggregate Index or whatever their benchmark is, they
go out and buy futures on top of that cash
instead of buying an actual treasury security. What that means is,
(09:33):
because it's a future, there has to be a seller
for every buyer of a futures contract. So that leaves
others which has to be then levered investors or dealers
short treasury futures. Now, if you're short of treasury future
and you don't want to be short treasury future, you
don't want to be short treasuries, what do you do?
You have to hedge that somehow, And there's only realistically
(09:54):
two ways that people hedge. One is you can buy
a treasury or you can receive in an interest rate swap,
and that's what we call an invoice spread. So it's
futures versus swaps is called an invoice spread. We can
go back to the history of the nineteen eighties about
how that got its name, but I think that's unimportant
for this discussion. So what you did see during that
period of time was not so much the treasury futures
(10:17):
basis trade unwinding, but you saw the swap spread portion
of that trade unwinding. And that's one reason why everyone
talked about the treasury futures basis, but it really if
you looked at the price action, it was really the
swap market that was moving around ten basis points at
a clip, just on every single headline, every single tweet.
And I think that that's more reflective of the leverage
(10:39):
that was being unwound, was more in the over the
counter swap market as opposed to in the futures. Well,
I was about say, future's pits is not really pits anymore, but.
Speaker 4 (10:49):
We get it, we get it.
Speaker 2 (10:50):
So just on the swap spreads point, this was basically
the bank deregulation trade slash duration trade that a lot
of people put on posts Trump's win in November.
Speaker 5 (11:01):
That's my understanding, correct, Yeah, and we did too. So
after President Trump won, the expectation was that the enhanced
supplementary leverage ratio would be removed and that would allow
banks to own more treasuries. So therefore, if they could
own more treasuries instead of receiving and interest rate swaps
to get a little bit more duration to hedge other things,
(11:22):
they could buy treasuries out right instead. So most people,
both strategists as well as market participants were putting on
swapspread wideners. So swapspreads have been negative even when we
still have libor. So now we use something called SO
for the secured overnight financing rate, which is basically the
repurchase agreement market that's used as the underlying for these
interest rate swaps. It used to be libor. Even when
(11:42):
it was libor, swap spreads in the long end especially
were very negative, and the reason for that was the
new regulations that went into effect again, both dot frank
and some basle regulations, plus a very underappreciated part of
the market, which is insurance company regulations, which are often
regulated by states, not by the federal government. So when
(12:04):
states said, oh, you have to have a more diversified
portfolio of credits within your general account for life insurance
companies or p and C property and casualty insurers we
call them p and C insurres, they go out and say, okay,
we want to buy thirty year single a corporate debt. Well,
if you want to be diversified and be in one
(12:24):
hundred different names, there's not one hundred names that your
credit analysts are going to let you be in and
allow you to buy that issue thirty year debt. So
what happens is they end up having to buy ten
year debt or even five year debt in some cases,
and that leaves these insurance companies with this massive duration
gap because they have long term liabilities. Right life insurance
(12:45):
contracts are very long term liabilities. They need to hedge
that with having their own long term assets on their
balance sheet, and that ten year corporate doesn't meet that need.
So how then does an insurance company end up making
up that duration gap? And the answer is they receive
an interest rate swaps because it's capital efficient. When you
start an interest rate swap, your cost is zero as
(13:07):
opposed to going out and buying a treasury or even
buying a treasury strip, so as zero coupon long term
treasury we call them treasury strips. They don't want to
do that because it's not balance sheet efficient. So that's
kept swap spreads negative. But what kept swapsharp is even
more negative, was the fact that banks couldn't own enough
treasuries in order to kind of hedge their own short
exposure to interest rate swap. So it's underappreciated how much
(13:30):
bank and bank balance sheets really matter to the pricing
of a lot of these trades and security.
Speaker 4 (13:51):
First of all, I just think this is great, and.
Speaker 3 (13:52):
This is really clear as clear as these kind of
conversations can get.
Speaker 4 (13:56):
This is really helpful.
Speaker 5 (13:57):
You know.
Speaker 4 (13:57):
One of the things when people.
Speaker 3 (13:58):
Hear about these sort of like various trades that are
basis trade that are going on, they're like, oh, they're
leveraged sixty to one, and like, oh, they're just gambling.
And sometimes you hear about all the FED having to like,
you know, sort of stabilize the system. They're all these
regular speculators putting on insane leverage for picking up pennies
and now they're being backstopped. And what I like about
your explanation or your characterization is they're economic rationales for
(14:22):
this trade because it often gets flattened into speculation and
a casino. But various entities, whether it's the banks meeting
their regulatory obligations, the insurance companies are meeting their regulatory obligations,
there are real rationales for the existence of these markets
rooted in economics.
Speaker 2 (14:38):
Well, there's also a utility value, which is why arguably,
even though regulators are very aware of this you have
been worried about it, they haven't exactly done anything to
really like clamp down on it.
Speaker 5 (14:49):
No, totally.
Speaker 3 (14:49):
Like these markets serve economic purpose in a way that
sometimes I think doesn't come through. Let's go to the
night that I fell asleep on my couch.
Speaker 2 (14:59):
You know, there's the night that shall forever be known
as Joe falling asleep on his couch while looking.
Speaker 4 (15:04):
At Bloomberg charts that night.
Speaker 3 (15:06):
So when the market's selling off, when treasuries are selling
off intensely, you know, I think there's like various interpretations
or people have different ideas. So that's like, oh, it's
China getting revenge, or it's a steepener trade. There's going
to be more inflation in the future, and so the
path of interest rates is going to be higher than
(15:26):
we otherwise theod thought. And I'm a sort of strict
constructionist reader of the yield curve, so I always like that.
And then there's liquidation. Someone has to meet a margin
call somewhere, pay cash somewhere, and so they have to
sell their low liquidity treasuries to get a cash or whatever.
Speaker 4 (15:41):
What was I watching on the couch that night.
Speaker 5 (15:44):
Yeah, so I think there were a few things that
you were watching. One is you were looking at a
market that was very liquid. Keep in mind when you
fell asleep on your couch at midnight East Coast time. Yeah,
London was not yet open. Okay, so you were talking
about Tokyo and Hong Kong and Singapore were basically the
liquidity providers at the time in terms of dealer and
dealer desks, and they're going to be constrained. So even
(16:07):
if you only had a little tiny bit of selling
right in terms of volume, if it was all one
way at the same time, you probably had dealers that
weren't willing to take on that exposure at that moment.
And you'll notice on that day, like if you just
do an inter date chart and do a GP on
the tenure yield on the Bloomberg terminal.
Speaker 4 (16:26):
I've done it.
Speaker 5 (16:27):
Yeah, you can see as soon as London opened, the
market actually came back, and the market actually rallied a bit,
and there wasn't really any headlines at two am New
York time. But the fact is you had more liquidity.
So now you had some bottom fissures. Some people said, oh,
I can now buy a ten year bond two dollars
cheaper than I could last night, or when the market
closed yesterday, so you know, let's just cover a short
(16:49):
or just maybe take a little bit of a punt
and a long position. And then the market was still
very volatile after that. And I think part of the
reason it continued to be volatile was, besides the fact
that we had all of the tweets on again off
again tariff talk, is that people don't like to get
in front of volatility. And the fact is when volatility
is high, dealers tend to not only widen their bid offers,
(17:12):
but they also pull back. And another I think underappreciated
aspect of this too, and again I go back to
financial sector balance sheets. If you look at dealers, dealers
were as long treasuries going into this as they've ever been,
so they own more treasuries than ever in history. Now
part of that is because the treasuring market is bigger,
but a lot of these treasuries that they added they
(17:33):
added within the last six months. So this wasn't like
it wasn't like it turned on the dime, and it
wasn't very systemic. But the fact that there was a
lot of cash already on dealers balance sheets and still
is dealers are still very long cash bonds right now,
and again there are short futures on the other side
of that, It probably meant that they weren't able to
take on a lot more supply without getting approvals. Right,
(17:54):
you have to go to your risk manager and say, hey,
we'd like to make markets here, but we're fall like
can we make markets? So there are a certain amount
of regulatory arbitrage that you can't do today that you
were able to do prior to the Basle three capital
rules going into effect. It's what I call balance gad elasticity. Basically,
dealers don't have the same type of balance sheet elasticity
(18:16):
as they used to have prior to Basil two and
a half in Basil three rules.
Speaker 2 (18:19):
Right, So I hate this term. But people are asking
questions about what real money investors did in all of this,
and you know, money is money in my book. But
the idea of you know, I guess people that are
holding these things on a longer term basis these real
money investors. And this to me is actually like, this
is the scenario that could be more worrying than a
(18:41):
basis trade blow up, because like, okay, basis trades blow up,
the FED can basically come in and do something pretty
easily nowadays, and we're talking about a single levered trade
that's based on arbitraging, like a very technical relationship that's
blowing out, and so all of those positions are getting
changed very rapidly. But if we're talking about the collapse
(19:03):
of a real money investment in US debt because of
all this policy uncertainty and people wanting to I guess
dedollarize their balance sheets, that seems much more existential to me.
So what have you observed in the case of real
money investors?
Speaker 5 (19:19):
So it depends on how you define real money. So
I agree with you Tracy there. You know, you're talking
about central banks, sovereign wealth funds, action managers, you know,
pension funds and the like, right, so, and they all
have different economic reasons why they participate in the bond
market in general and the treasury market in particular. So
we can go through each of those very briefly. So first,
(19:40):
you know, it's not obvious to me that central banks
were selling. So this idea that you know, Joe brought
up some one of the things that people were saying,
that oh it's China selling.
Speaker 2 (19:49):
Kind of dumping treasury.
Speaker 5 (19:50):
Yeah, and the fact is is that And I'm not
going to talk specifically about China, but central banks in
general when they own treasuries for their reserve account. So
whether they own treasuries, or they own German boons, or
they own something in Sterling or Japanese government bonds, they
own short term securities. They don't go out and buy
tens and thirties because they don't want to take a
lot of price risk. They want to be able to
(20:12):
have their portfolio run off. And you've seen China do
this actually over the last ten years or so, reduce
their portfolio in order to defend their currency. And they
want to be able to do that very quickly without
moving the market a lot. And in order to do that,
you own short term debt. Now who does own the
long term debt? And we put out a chart about
this actually a couple of weeks ago, actually on the
eighth and most foreigners who own the long end are
(20:33):
private investors. So these are portfolio investors. These are pension funds,
insurance companies, and they own those because they can buy
treasuries and even after currency hedging, pick up yield compared
to their own home currency. So one of the perfect
examples of that is Taiwan. So taiwan Es insurance companies
will buy a lot of US debt, both corporates and treasuries,
(20:54):
and if they hedge it back, they still pick up
yield compared to the Taiwanese dollar debt. So they like
doing that trade, right, Why wouldn't you You pick up
yield and you get US treasury risk instead of time
on treasury risk. If you go to a central bank,
they won't be doing that, right. They'll go out and
they'll participate in three year auctions to your auctions. They'll
buy T bills and let that roll off. So the
(21:15):
price action that occurred during that period of time April
seventh to April eleventh didn't react like one would expect.
If you had central banks who were massive sellers of treasuries,
you would have expected to see the front end sell off.
But no, the front end rallied right, So you saw
lower yields in short term debt and higher yields and
long term debt. I think part of that was an
(21:35):
inflation trade. I think that a lot of people thought
and did think. And I was up late some of
those nights too, talking with clients in Asia and what
you heard from many of them is, isn't all of
this just inflationary? Because what Donald Trump and his administration
are doing is going to force us into recession or
he's going to fire Powell. And if he thought does that,
then interest rates are going to be too low, tariffs
(21:56):
are going to keep inflation higher. So that all was
a curve, and that's really the trade that you saw.
You saw that twist deepening of the yield curve.
Speaker 3 (22:05):
By the way, listeners, especially those who have come new
to odd Lots, either in recent weeks or recent years,
should really go back to I think it was twenty nineteen,
right Tracy with Brad Setzer, one of our legendary episodes
about Taiwan Life insurers and their voracious appetite for US
treasuries and the role that the Central Bank of the
Republic of China, which is Taiwan's central bank plays.
Speaker 2 (22:28):
The closest thing we've ever done to a true crime podcast.
Speaker 4 (22:31):
Yeah exactly. We're not alleging any crime, but it was.
Speaker 5 (22:36):
Misery.
Speaker 3 (22:36):
I had that sense of mystery when anyway, people should
go back to this one of the all.
Speaker 4 (22:40):
Time great episodes.
Speaker 3 (22:43):
Going back again the night of April eighth, this inflation
trade idea, I mean, because you mentioned and it was
very helpful that these were hours of low liquidity. London
hadn't opened yet, the dealer balance sheets are already priced
up to the gills, not really inclined to take on
treasuries in that moment. But it still raises the question
(23:03):
of the impetus for the selling by the marginal traders
at the time, why they were selling in the first place,
as opposed to buying safe haven asset, because that's often
what you do when the stock market is selling. Is
it essential? And it sort of sounded like in your
last answer that it was just a mini version of
that twenty twenty two dynamic where if you have bad
growth outcomes and sort of bad inflation outcomes, you sell
(23:27):
stocks and treasuries at the same time.
Speaker 5 (23:29):
Yeah, if that's if you're looking for a fundamental reason,
I would say that that would have been the fundamental impetus.
But I suspect much of it is just positioning. Like, okay,
I think what is underappreciated. You know, some people say
that this is just a cop out by you know,
some strategist who doesn't know what's going on, And I
can appreciate that a little bit, but positioning does matter.
So if there were people who were long treasuries in
(23:49):
Asia at Asia hours, like let's say that it's a
sovereign wealth fund or an asset manager in Hong Kong
or Singapore who was long ten year treasuries and thirty
year treasuries because they thought US was going to have
a recession and we were going to have lower interest
rates and all of that. And all of a sudden,
you hear everything coming out of New York. You wake
up in the morning and you say, maybe I have
(24:10):
too much risk on and then you try to take
off some of that risk in a market that's not
able to absorb that risk because dealer balance sheets are
completely anelastic the price then has to move pretty dramatically,
and you've seen that over different periods of time. Look,
the Treasury Department right now holds a conference every year
that I attend very regularly, not every year, but probably
(24:31):
two out of every three years about resilience of the
treasury market. And that all stemmed from about ten years ago.
We had the flash rally where US treasuries rallied fifty
basis points in fifteen minutes on no news right on nothing.
So why would that have happened. Well, it's because, well
the rumor was.
Speaker 2 (24:51):
That it was something happening, right, but no one was
ever able to prove it correct.
Speaker 5 (24:56):
Yeah, and look I met with the Treasury Department at
that time. I sat on a dealer and one of
the what was then one of the major treasury dealers,
and you know, nobody exactly knew what was going on,
but there was trading that was going on. It was
just a very small size. No one was willing to
take on, you know, basically short the market in a
very significant way. And this was in some ways just
(25:16):
the opposite of that. And as the treasury market's gotten bigger,
keep in mind the treasury market's nearly thirty trillion dollars
of marketable debt outstanding, of which about twenty three trillion
dollars is coupon, so not te bills. I always take
T bills out of this equation, by the way, because
when people say, oh, there's this wall of debt that
has to be refinanced this year, the fact is seven
trillion of that or near seven trillion of that is
(25:37):
treasury bills.
Speaker 4 (25:38):
That's good to know.
Speaker 5 (25:39):
And with two A seven money market funds having seven
trillion dollars and only allowed to buy treasuries or do
treasury repurchase agreements, they're not a rollover risk. So take
take T bills out of the equation, because the reason
why Treasury issues all those tea bills is because that's
where demand is. They would issue less if there was
less demand. But there is a significant amount of treasuries
(26:00):
that need to be rolled over every year. Right There's
you know, half a trillion dollars to a trillion dollars
every year of coupons that mature need to be rolled
over just about every quarter. So when you're in a
situation like that and you're treasury dealer and you have
to bid at these auctions, you have to save some room,
and you can't always be full on treasuries, and you
don't want to get full on treasuries at midnight. If
(26:22):
you're again like one of the bulch bracket banks and
the overnight trader in Hong Kong, the last thing you
want to do is get a tap on your shoulder
from a risk manager and have that risk manager say
to you, hey, you broke your budget. You know the
door's over there. So there's career risk involved in all
of this as well, which I think is also a
second thing that's underappreciated is just mentality of trading desks
(26:43):
is meaningfully different than it was again before Basle, because
risk managers run the market now, not traders, and I
think that that's also something else that's underappreciated by a
lot of people.
Speaker 2 (27:08):
I take the point about career risk and dealer capacity
for risk being more constrained than it was pre some
of the Basil rules, but it does strike me just
getting back to the sort of existential angst when it
comes to demand for US treasuries. We have seen some
figures that suggest that we just saw, you know, like
run of the mill selling of US treasury. So for instance,
(27:32):
we had Japan's Ministry of Finance showing that private investors
in the country sold like seventeen point five billion in
long term bonds in the week this was ended April fourth.
I actually needed to go and look at what the
week after happened. But even before then, Japan's private sellers
they sold a bunch of US bonds, like literally right
(27:53):
before early November when we had the election, And if
we look at some of the commentary we've seen from
analysts over the years, there's a lot of discussion of
a lack of structural demand for US treasuries, especially overseas. Right, Like,
some of the foreign buyers that were buying US debt
a decade or two decades or three decades ago just
(28:15):
aren't buying as much of it as they used to
talk to us about. Like the I guess long term
outlook for US treasury demand, where is that going to
be coming from? And how true is it that we
have seen a bit of a rebalancing from foreign to
domestic sources.
Speaker 5 (28:33):
Well, we certainly have seen a massive shift away from
Keep in mind about ten years ago, and I can
get the exact number later, but about ten years ago,
about half of US debt was owned by foreigners. Now again,
most of that was it was split out pretty evenly
between central banks and private investors in terms of the
(28:54):
risk that they owned. And we talk about risk, not
necessarily the notional value, because we care about you know,
who's buying the riskier parts of the market. So ten
years and thirty year debt, for example, you can buy
a little bit of that and effectively buy a lot
of risk the central banks have certainly been diversifying their portfolios,
and I think that this makes a lot of sense.
(29:16):
Right if you were a central bank and you said
fifteen years ago, you said, oh, ninety plus percent of
our foreign exchange reserves are all in US dollars, but
we only do fifty percent of our business our trade
in the US dollar. We do a lot in euros,
and we do a lot in yen, right, so we
want to diversify our foreign exchange holdings. That's something that
(29:37):
has been going on for better part of a decade,
and in fact, aggregate ownership of US treasuries has actually
kind of been flatlined, and as a share of the market,
it's gone way down now. But who's replaced that we
have to keep it To keep this in mind too,
and this is to your point, Tracy, I think, is
like who's going to be the incremental buyer? Because the
Fed now owns a lot more treasuries than they did, right,
(29:58):
because they did quantitative ease for the better part of
three years and they purchased a significant share of the market.
Now they don't own an unusually high share of the market,
but in notional terms, it's a very large share. So
the FED usually owns around twenty percent of the treasury
market and has basically since the nineteen sixties, Right, It's
always owned about twenty percent of the market, But now
(30:20):
the market is so massive, and they were really a
very large non economic buyer of treasuries that they're hard
to replace in the market without their being additional. You know,
I don't love the concept of term premium the way
that we measure it, but there is term premium right
in the market, and at some point, term premium has
to go up if you are not sure where demand
(30:42):
is going to come from from these longer duration assets,
and by doing what President Trump's doing, there is a
fear out there. And I've spoken to a lot of
investors both here in the US and overseas about is
there going to be significant demand for treasuries if, say
to Trump administration's able to get our trade better in
line the buying of treasuries that you saw back in
(31:04):
the early two thousands and right after the global financial
crisis that also coincided with a massive increase to the
US current account deficit, So we were effectively exporting a
whole lot of dollars, and as we're exporting those dollars,
the financial account has to balance, So one of two
things has to happen. Either people sell the dollar and
then buy their home currency. Therefore their own currency winds
(31:26):
up appreciating versus a dollar, and that makes them less competitive,
and I think that's kind of what President Trump seems
to want to do at least as one of the
outcomes of all of this tariff negotiation and trade negotiation.
Or you have to go out and buy a US
dollar denominated asset. Now that could be a hard asset,
it could be corporates, it could be but treasuries are
the thing that most countries want to own because it's liquid.
(31:49):
You buy short term treasuries and you kind of know
you're going to get your money back. You also know
that you could replace them very easily because there's auctions
every single month. So there's a whole reason why you
would want to own treasuries. When the current account bounce
is massive, go back and just you know, you can
go on the Bloomberg terminal or go on go on
to our Bloomberg Intelligence dashboard bi rates and you can
(32:12):
look at just how much foreigners bought of US debt
as the current account deficit went up as a current
account deficit got better. In the second half of the
twenty teens, you saw that there was significant slowing of
what foreigners were buying of US dollars because they just
didn't need to. They had other alternatives and they and
the current account deficit was significantly lower.
Speaker 4 (32:33):
So I just have one last question.
Speaker 3 (32:34):
I mean, first of all, when it comes to who
is going to own US treasuries. A. I hear that
there's a big tax cut plan that's in the works
in DC, So that's one pocket of people having more
cash and theoretically marginal buyers. B. You know, you're talking
about closing the trade deficit. In theory, the only way
we really closed the trade deficit is with a significant
(32:56):
fiscal tightening, and so therefore you just have less debt
to sell. But just on the my last question is,
you know, Tracy and I are on opposite sides of this,
the term premium question. I am yet to convinced be
that it's a useful concept. I like, the old curve
is the old curve, it's the what.
Speaker 4 (33:13):
It sounds like. You're somewhere in the middle.
Speaker 3 (33:15):
So settle at least the IRA Jersey verdict on how
we should think about the usefulness or the usefulness of
measuring this thing called the term premium.
Speaker 5 (33:25):
So the term premium exists. It must exist. But I
called it the dark matter before some members of the
Federal Reserve called it the dark matter of the treasury market.
Term premium has to exist because you have to be
compensated for risks outside of what the Federal Reserve is
going to do. And the greater the uncertainty, the greater
the term premium should be. The farther you go out
(33:46):
the curve. And that's one of the reasons why the
yield curve generally is upward sloping. Right, not always, but
generally it's upward sloping because of the uncertainty about the
future path of interest rates, and there's you know, there
is probably a little tiny bit of credit premium in
that term premium, but really it's a risk premium for
the unknown going forward. So term premium exists. I think
(34:07):
I don't love some of the models and the way
that we actually try to determine term premium. So the
FED has several different models, like the Adrian Crump model,
for example, which attempt to quantify what the term premium
is at any given moment. I like things that you
can trade, because that's our job. And the problem is
that if you tried to use the fed's models for
(34:28):
term premium and said, oh, this looks like it's too
steep or too flat, and you did those trades, you'd
lose more than half the time. So they're not particularly
good predictors of is the market rich or cheap? And
as investors, that's our job. So they might be interesting
on an academic basis, but if I can't trade it,
I don't care about it. And that's why generally speaking,
I look at the yield curve. I do have my own.
(34:51):
It's more of a fair value model for the yield
curve as opposed to a term premium model, but it
has a similar effect. But you can determine are we
rich or cheap given the variety of outcomes from both
the FED reserve and also supply and other inputs that
we use for those models.
Speaker 2 (35:07):
Joe, you should just admit you were wrong about the
term premium because we started arguing about this late last
year early this year when the term premium was going
up a lot, and you thought it was all about
Fed expectations, and now now here we are and it's
still going up.
Speaker 3 (35:22):
I have to admit something that A is completely not
useful for trading, and B only exists because it theoretically
has to exist in this world, but we can't observe it.
Speaker 4 (35:32):
Fine, I'll admit it.
Speaker 5 (35:33):
Fine.
Speaker 2 (35:34):
Oh Mike, Okay, Wait, speaking of something else that Joe
was wrong about. Can we talk about bond market vigilantes
for a second. So I think there was this expectation
going into twenty twenty five and the new Trump administration
that he was going to be all about stock prices,
and you know, he talked a lot about stock markets
going up in his first presidency. He kind of suggested
(35:55):
he wanted stocks to go up in his second presidency,
and then we saw the big market crash. But you know,
looking back on it, it kind of feels like bonds
were the pressure point for him when it comes to
ratcheting back some of the tariff tenshion. What's the role
of the bond market, I guess when it comes to
influencing the new Trump administration.
Speaker 5 (36:18):
I wish we had any real good color about that,
because that would be very helpful for analyzing what's going
to come next. I think it matters in many respects.
In particular, remember they said that, hey, they really want
to try to get the ten year treasury yield down.
When Treasury's rallied for the month of February and early March,
remember President Trump said, oh, look, interest rates are lower. Now,
(36:39):
that's what we're trying to do. Of course, we've sold
off since then in March, part because of this risk
premium that we're talking about, as well as some of
the structural issues that we discussed earlier in the show.
I think it matters because, look, the fact is, even
if the President is able to find half a trillion
dollars in savings and that sounds so weird to say
half a tree brillion and still not being big enough
(37:02):
to kind of matter, you're still going to have trillion
dollar deficits that need to be funded, not to mention
rolling over the existing debt that's going to be maturing.
And as that occurs, you know, you want to get
the lowest borrowing costs for the taxpayer. So I understand
that President Trump really would like to see lower tenure yields.
But one way to do that is to actually issue
less ten year bonds, right, that's one way, But you
(37:24):
can't do that unless you really significantly decrease the deficit
and actually even maybe balance the budget, right, because you're
going to be issuing more and more. In fact, we're
coming out with our Treasury Funding report probably right around
the time that a lot of people listening to this on.
It'll be on the twenty fifth of April, and next Wednesday,
the Treasury Department will decide and Scott Bessen and his
(37:47):
appointees will decide how they're going to fund the deficit.
And they're still going to be nearly a two trillion
dollar deficit this year, and he's going to have to
issue ten year treasuries. So I think that if there's
not demand from overseas, investors lose faith in the US
government and its ability to continue to finance the debt.
(38:07):
That has to worry at any administration, regardless of whether
it's President Trump or President Biden or whomever.
Speaker 2 (38:13):
All Right, Ira, this is what we call a deliciously
information data dense episode. So thank you so much for
coming on. All thoughts, I'm so glad we could finally
get you on the show, particularly at this exact moment
in time.
Speaker 3 (38:27):
And thank you so much for taking my side and
saying I was correct on the term premium. I really
appreciate you coming on offline lies Lies.
Speaker 5 (38:34):
Absolutely happy to be here.
Speaker 4 (38:47):
That's what I heard, Tracy. Didn't you say I was correct?
Speaker 2 (38:50):
No, you both were wrong. You both said it was
fed expectations at the time, I was the only one
who was right. That was a great conversation. And there's
a lot of technicality in all of this, but like
part of the story, as Ira was highlighting, is the
technicalities of like the structure of the US bond market.
Speaker 5 (39:08):
Right.
Speaker 3 (39:08):
This is where we certainly agree, which is that it's
not always a fudge factor when people talk about technical
aspects or positioning. I think we both completely agree on this.
And you can especially that stuff about like just you know,
the idea of dealers in Asia and why for various
regulatory reasons and other trade reasons they had all these
(39:29):
what their balance sheets were. I love that idea that
like it's the risk managers, not the risk takers, driving
the market.
Speaker 4 (39:35):
Very useful conversation.
Speaker 5 (39:37):
On that front.
Speaker 2 (39:37):
Yeah, But that said, I mean, I think there are
still some longer term like changes in structural demand for
US treasuries. You know, you can go back to reports
that were published by like it might even have been
Josh Younger at JP Morgan a few years ago about
you know, JP Morgan is worried about who's going to
buy all the US bonds because we have seen that
(39:58):
structural retreat in receives demand. And if we think about
what Trump is trying to do right now in terms
of rebalancing global trade and reducing the US trade deficit,
it does seem like one of the outcomes of that
is structurally less demand for US treasury.
Speaker 3 (40:16):
Well, one thing that's really interesting. We're so we're all
recording this April twenty fourth, and right now the stock
market is flying today, and actually it's really not that
far below now. At last I looked, it was only
three and a half percent below where it was on
Liberation Day. But we are very close still to the
bottom of the recent range in the dollar. And so
(40:36):
one way that that sort of retreat from America trade
expresses itself, in my mind, is not necessarily through the
price of the curve or anything, but just the fact
that like relative to the rest of the world, the
dollar is less appealing. On one other thing, I just
want to get in on the question of the treasury
market's influence on the government. I certainly one hundred percent
agree with you that the government clearly while it's lower
(41:00):
and it doesn't like higher yields for all kinds of it.
They've said it, they've said it's God best and has
said it. The only reason I don't like the term
dollar vigilantes is I bon bond vigilantes is that it
prescribes a level of sort of like agency that I
don't think is helpful. O.
Speaker 2 (41:16):
Sure, we know, like there was not a single market.
Speaker 3 (41:20):
Why I don't like it as a descriptive frames.
Speaker 2 (41:24):
Look, we're talking about complicated concepts. I think you have
to have some shorthand here, and I do think, you know, like,
looking at what happened, it does seem like the administration
at a minimum, you can say they seem to care
about rates, which means they care about what bond investors
are doing. I would like it if there was like
an actual bond vigilante who you could, like, you know,
(41:46):
you could flash one of those like Batman signals in
the sky for the bond vigilante and they would all
come out and start selling you as treasuries and affect
change in certain policies that would be interesting anyway, shall
we leave it there?
Speaker 4 (41:59):
Let's save it there.
Speaker 2 (42:00):
This has been another episode of the aud Loots podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3 (42:05):
And I'm Joe Wisenthal. You can follow me at the Stalwart.
Follow Ira Jersey. He's at Ira f Jersey. Follow our
producers Kerman Rodriguez at Kerman Erman, Dashel Bennett at dashbod
and Kele Brooks and Kale Brooks. For more odd Laws content,
go to Bloomberg dot com slash odd Lots, where we
have a daily newsletter and all of our episodes, and
you can chet about all of these topics twenty four
(42:27):
to seven in our discord with fellow listeners Discord dot
gg slash od Lots.
Speaker 2 (42:32):
And if you enjoy odd Lots, if you like it
when Joe and I argue about the existence of the
term premium, then please leave us a positive review on
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Thanks for listening in
Hosts And Creators
Joe Weisenthal
Tracy Alloway
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