What We Learned About Treasuries on the Night of April 8

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 TariffsUS Bonds Rally as Fed’s Hammack Revives Odds of a June Rate Cut Only Bloomberg - Business News, Stock Markets, Finance, Breaking & World News subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

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• 0:00Speaker 00

  Finance is increasingly being built on digital rails. But as the adoption of virtual assets, tokenization and stable coins grows, can regulation not only keep pace but help accelerate it? Find out more later in the podcast.

• 0:16Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 0:58Speaker 01

  and hiring practices, but according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at chatgpt.com.

• 1:41Speaker 01

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• 1:57Tracy Alloway?

  Hello and welcome to another episode of the Odd Thoughts Podcast. I'm Tracy Alloway.

• 2:02Joe Weisenthal?

  And I'm Joe Wazenthal.

• 2:03Tracy Alloway?

  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 the next thing immediately, right?

• 2:23Joe Weisenthal?

  Well, I've always said hindsight is not 2020 because we all disagree about things that have happened in the past. We know that all the time. So I've always hated that cliche. 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 null and void by the time it's released.

• 2:45Tracy Alloway?

  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 2025. 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 people buy US 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 yet, that's exactly what we saw happen in April, post-Trump's Liberation Day on April 2nd. So we should talk about it.

• 3:28Joe Weisenthal?

  Totally. In particular, the night of April 9th. Now, the 10-year yield actually peaked on April 11th. We're recording this April 24th. The recent peak was April 11th. But April 9th, I will never forget as the night that I got zero sleep because I was just refreshing my Bloomberg app on the couch because I just was watching this yield spike. And everyone was like, it's China dumping. No, 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 8th.

• 3:57Tracy Alloway?

  This is already revisionist history because you're on the record saying that you did in fact fall asleep. Couch.

• 4:02Joe Weisenthal?

  Right, I did.

• 4:03Tracy Alloway?

  And now you're saying you got no sleep.

• 4:04Joe Weisenthal?

  So, yeah, it was late and the the peak was actually, I don't know, somewhere in there.

• 4:08Tracy Alloway?

  Whatever. Point 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 tariff regime, et cetera. So we should talk about it.

• 4:35Joe Weisenthal?

  By the way, 12:10 a.m. on the morning of April 9th was that intermediate peak. So I think I had been still awake by then. Keep going.

• 4:43Tracy Alloway?

  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've wanted to get on the podcast for a really long time. And shame on us, we didn't do it because he's, he's, he's here at Bloomberg and he's sort of widely available. So we just kind of 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. Ira, thank you so much for coming on Odd Lots.

• 5:21Speaker 04

  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.

• 5:31Tracy Alloway?

  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, 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 against your previous experience in bonds?

• 5:55Speaker 04

  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 2008 for me. Back in those days, I was covering Fannie Mae and Freddie Mac, 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 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, is there going to be

• 6:38Speaker 04

  a new world order? What does it mean when you get, you know, 30 basis point spikes in the 10-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 end game is. But yeah, like you said, Tracy, there's absolutely no lack of things to talk about.

• 7:00Joe Weisenthal?

  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 2020?

• 7:21Speaker 04

  Well, I think in March 2020, 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 end game 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 the fact that the end game was kind of understood at the time, and policymakers acted very quickly because they knew what the path would be if they didn't do anything. In 2008, we knew that, like, look, if TARP didn't pass, what might have happened to the banking sector at the time? You just had Lehman go under, you just had Fannie and Freddie go under. So, and, and yes, there was some policy response, but it wasn't enough, like, the Fed alone wasn't enough to...

• 8:05Speaker 04

  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 end game ultimately is, right? We don't know, is this the administration's way of getting people to the table for things like defense burden sharing? 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.

• 8:44Speaker 04

  And I think the moves in the treasury market kind 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, you know, over a dozen years since the Basel 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. 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 7th of April, like we did on the 9th of April.

• 9:20Tracy Alloway?

  Well, okay, so since Joe brought up 2020 and the response from the Fed back then, why don't we go ahead and let's just talk about the basis trade? 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 a macro pod is blowing up, right? Or a pod shop. What did I say? Macro pod? Multi-strategy.

• 9:47Speaker 04

  A pod is blowing up.

• 9:47Tracy Alloway?

  Yeah, a 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 and with some new numbers and information that's been coming out?

• 10:06Speaker 04

  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 in 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 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 policymakers were worried about because they are very highly levered trades, but they have to be. But why were these trades created?

• 10:50Speaker 04

  So these 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 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 a Treasury future and you don't want to be short a 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 two ways that people hedge.

• 11:35Speaker 04

  One is you can buy a Treasury or you can receive 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 1980s 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 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 10 basis points at a clip just on every single headline, every single tweet. And I think that that's more reflective of the leverage that was being unwound was

• 12:20Speaker 04

  more in the over the counter swap market as opposed to in the futures. Well, I was about to say futures pits, it's not really pits anymore.

• 12:28Tracy Alloway?

  We get it, we get it. So just on the swap spreads point, this was basically the bank deregulation trade slash duration trade that a lot of people put on post Trump's win in November. That's my understanding.

• 12:42Speaker 04

  Correct, yeah, and we did two. 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 an interest rate swaps to get a little bit more duration to hedge other things, they could buy treasuries outright instead. So most people, both strategists as well as market participants, were putting on swap spread wideners. So swap spreads have been negative even when we still had LIBOR. So now we use something called SOFR, 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 it was LIBOR, swap spreads in the long end especially were very negative.

• 13:26Speaker 04

  And the reason for that was the new regulations that went into effect, again, both Dodd-Frank and some Basel 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 states said, oh, you have to have a more diversified portfolio of credits within your general account for life insurance companies or PNC, property and casualty insurers, we call them PNC insurers, they go out and say, okay, we want to buy 30-year single A corporate debt. Well, if you want to be diversified and be in 100 different names, there's not 100 names that your credit analysts are going to let you be in and allow you

• 14:09Speaker 04

  to buy that issue 30-year debt. So what happens is they end up having to buy 10-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 contracts are very long-term liabilities. They need to hedge that with having their own long-term assets on their balance sheet. And that 10-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 opposed to going out and buying a treasury or even buying a treasury strip. So a zero coupon long-term treasury We call them treasury strips.

• 14:54Speaker 04

  They don't want to do that because it's not balance sheet efficient. So that's kept swap spreads negative. But what kept swap spreads 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 bank and bank balance sheets really matter to the pricing of a lot of these trades and securities.

• 15:30Speaker 00

  What's next for virtual assets? I'm Jacob Rees, host of Economy Scale, a series exploring growth in key global sectors. And in this episode, we're diving into the digital forces shaping finance. Sean McHugh from Dubai-based Virtual Assets Regulatory Authority has this to say.

• 15:46Speaker 05

  We're seeing a lot of institutional players come in, digital asset dedicated hedge funds, high frequency traders and that sort of thing, and folks who service institutional clients.

• 15:54Speaker 00

  As more capital enters the market, adaptive regulation is likely to become increasingly key. Reese Merrick of Ripple says.

• 16:02Speaker 06

  A lot of regulators globally would like to keep the industry at arm's length. That's the opposite here. I think also what you'll find is that regulation and frameworks can come out, but some of them are maybe a slight iteration on some 80-year-old policy and not actually in line with what the technology can do and offer. And again, that's very different in Dubai.

• 16:22Speaker 00

  Listen to the full episode wherever you get your podcasts. This series is brought to you by Bloomberg Media Studios and the Dubai Department of Economy and Tourism.

• 16:32Speaker 01

  This is the Bloomberg Tech Minute, brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Businessweek's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands up. Experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices.

• 17:15Speaker 01

  But according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company. And Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute, brought to you by ChatGPT. Get started at ChatGPT.com.

• 17:55Joe Weisenthal?

  First of all, I just think this is great. And this is really clear, as clear as these kind of conversations can get. This is really helpful. You know, one of the things when people hear about these sort of like various trades that are basis trade that are going on, they're like, oh, they're leveraged 60 to one. And like, oh, they're just gambling. And sometimes you hear about, oh, the Fed having to like, you know, sort of stabilize the system. There are all these reckless 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 their economic rationales for 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.

• 18:37Joe Weisenthal?

  There are real rationales for the existence of these markets rooted in economics.

• 18:42Tracy Alloway?

  Well, there's also a utility value, which is why arguably, even though regulators are very aware of this and have been worried about it, they haven't exactly done anything to, to really like clamp down on it.

• 18:53Joe Weisenthal?

  No, totally. 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. You know, there's very-

• 19:04Tracy Alloway?

  The night that shall forever be known as Joe falling asleep on his couch while looking at Bloomberg charts.

• 19:09Joe Weisenthal?

  That, that night. So when the market's selling off, when trade- 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 we otherwise 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 make a margin call somewhere, pay cash somewhere. And so they have to sell their low liquidity treasuries to get cash or whatever. What was I watching on the couch that night?

• 19:48Speaker 04

  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, 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 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 intraday chart and do a GIP on the 10 year yield on the Bloomberg terminal.

• 20:30Joe Weisenthal?

  Believe me, I've done it.

• 20:31Speaker 04

  Yeah, you can see as soon as London opened, the market actually came back and the market actually rallied a bit. And, and there wasn't really any headlines at 2am New York time. But the fact is you had more liquidity. So now you had some bottom fishers, some people said, oh, I can now buy a 10 year bond $2 cheaper than I could last night or when the market closed yesterday. So, you know, let's just cover a short or just maybe take a little bit of a punt in 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, the 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,

• 21:16Speaker 04

  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 treasury market is bigger, but a lot of these treasuries that they added, they 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, the dealers are still very long cash bonds right now. And again, they're 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?

• 21:58Speaker 04

  You have to go to your risk manager and say, hey, we'd like to make markets here, but we're full, like, can we make markets? So there's a certain amount of regulatory arbitrage that you can't do today that you were able to do prior to the Basel III capital rules going into effect. It's what I call balance sheet elasticity. Basically, dealers don't have the same type of balance sheet elasticity as they used to have prior to Basel two and a half and Basel III rules.

• 22:23Tracy Alloway?

  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 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.

• 23:03Tracy Alloway?

  But if we're talking about the collapse of a real money investment in US debt because of all this policy uncertainty and people wanting to, I guess, de-dollarize their balance sheets, that seems much more existential to me. So what have you observed in the case of real money investors?

• 23:23Speaker 04

  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, asset 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, you know, it's not obvious to me that central banks were selling. So this idea that, you know, Joe brought up some of one of the things that people were saying that, oh, it's China selling, selling bonds. China dumping treasuries. Yeah. And, 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

• 24:07Speaker 04

  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 have their portfolio run off. And you've seen China do this actually over the last 10 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, 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 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 yields compared to their own home currency.

• 24:50Speaker 04

  So one of the perfect examples of that is Taiwan. So Taiwanese insurance companies will buy a lot of US debt, both corporates and treasuries. And if they hedge it back, they still pick up yields compared to 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 Taiwan treasury risk. If you, 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, two year auctions. They'll buy T bills and let that roll off. So the price action that occurred during that period of time, April 7th to April 11th, 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?

• 25:33Speaker 04

  So you saw lower yields in, in short term debt and higher yields in long term debt. I think part of that was, was an inflation trade. I think that a lot of people thought and Think and I was 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 does that, then interest rates are going to be too low. Tariffs are going to keep inflation higher. So that all was a curve steepener. And that's really the trade that you saw. You saw that twist steepening of the yield curve.

• 26:08Joe Weisenthal?

  Hmm. 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 2019, right? Tracy with Brad Senter, one of our legendary episodes about Taiwanese 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.

• 26:32Tracy Alloway?

  The closest thing we've ever done to a true crime podcast.

• 26:35Joe Weisenthal?

  Exactly. We're not alleging any crime, but it was this.

• 26:38Tracy Alloway?

  It had that sense of mystery.

• 26:40Joe Weisenthal?

  It had that sense of mystery. When, anyway, people should go back to this. One of the all time great episodes. Going back again, the night of April 8th, 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 more treasuries in that moment. But it still raises the question 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.

• 27:19Joe Weisenthal?

  Is it essential, and it sort of sounded like in your last answer, that it was just a mini version of that 2022 dynamic where if you have bad growth outcomes and sort of bad inflation outcomes, you sell stocks and treasuries at the same time.

• 27:33Speaker 04

  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. 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 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 10-year treasuries and 30-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 too much risk on.

• 28:16Speaker 04

  And then you 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 inelastic. 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 two out of every three years, about resilience of the treasury market. And that all stemmed from about 10 years ago, we had the flash rally where US treasuries rallied 50 basis points in 15 minutes on no news. Yeah. Right, on nothing. So why would that have happened? Well, it's because-

• 28:54Tracy Alloway?

  Well, the rumor was that it was something happening, right? But no one was ever able to prove it.

• 28:59Speaker 04

  Correct. Yeah. And look, I met with the Treasury Department at that time. I sat on a dealer desk in 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 the opposite of that. And as the treasury market's gotten bigger, keep in mind, the treasury market's nearly $30 trillion of marketable debt outstanding, of which about $23 trillion is coupons, so not T-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 7 trillion of that or near 7 trillion of that is treasury bills. Oh, that's good to know.

• 29:43Speaker 04

  And with two way 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 so take take T bills out of the equation because the the reason why treasury issues all those T 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 that need to be rolled over every year, right? There's the, you know, half a trillion dollars to a trillion dollars every year of coupons that mature and 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

• 30:24Speaker 04

  treasuries at midnight if you're again, like one of the bulge bracket banks and you're you're 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 so there's career risk involved in all of this as well, which I think is also a second thing that's underappreciated is is just mentality of trading desks is meaningfully different than it was again before Basel 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.

• 31:13Speaker 01

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• 32:36Tracy Alloway?

  I take the point about career risk and dealer capacity for risk being more constrained than it was pre some of the Basel 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 Treasuries. So for instance, we had Japan's Ministry of Finance showing that private investors in the country sold like 17.5 billion in long-term bonds in the week. This was ended April 4th. I actually need to go and look at what the the week after happened. But even before then, Japan's private settlers,

• 33:18Tracy Alloway?

  they sold a bunch of US bonds like literally right 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 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?

• 34:02Speaker 04

  Well, we certainly have seen a massive shift away from, keep in mind, about 10 years ago, and I can get the exact number later, but about 10 years ago, about half of US debt was owned by foreigners. Yeah. Now, again, most of that was, it was split out pretty evenly between central banks and private investors in terms of the 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 10 years and 30 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, right?

• 34:44Speaker 04

  If you were a central bank and you said 15 years ago, you said, oh, 90 plus percent of our foreign exchange reserves are all in US dollars, but we only do 50% of our business or 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 has been going on for better part of a decade. And in fact, aggregate ownership of US treasuries is 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 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?

• 35:26Speaker 04

  Because they did quantitative easing 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 20% of the treasury market and has basically since the 1960s, right? It's always owned about 20% of the market. But now 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 there being additional, you know, we, 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 is going to come from.

• 36:11Speaker 04

  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 and overseas about is there going to be significant demand for treasuries? If, say, the Trump administration is able to get our trade balance better in line. Yeah. The the buying of treasuries that you saw back in in the early 2000s 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. Mm hmm. 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 up appreciating versus the dollar,

• 36:56Speaker 04

  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 the outcomes of 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. You know, you buy short term treasuries and you kind of know you're going to get your money back. You also know that you can 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 balance is massive. Go back and and just, you know, you can go in the Bloomberg terminal or go on, go on to our Bloomberg Intelligence dashboard, BI Rates,

• 37:39Speaker 04

  and you can look at just how much foreigners bought of US debt as the current account deficit went up. As the current account deficit got better in the second half of the 20 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 was significantly lower.

• 38:01Joe Weisenthal?

  So I just have one last question. 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, when you were talking about closing the trade deficit, in theory, the only way we really Close the trade deficit is with a significant 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 convince be that it's a useful concept. I like the old curve is the old curve. It's the, it sounds like you're somewhere in the middle.

• 38:43Joe Weisenthal?

  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.

• 38:53Speaker 04

  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 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.

• 39:34Speaker 04

  I think I don't love some of the models and the way that we actually try to determine term premiums. 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, is that if you tried to use the Fed's models for 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.

• 40:18Speaker 04

  I do have my own, 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 Federal Reserve? And also supply and other inputs that we use for those models.

• 40:36Tracy Alloway?

  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 later and it's still going up.

• 40:50Joe Weisenthal?

  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. Fine. I'll admit it. Fine.

• 41:02Tracy Alloway?

  Oh, my. 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 2025 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 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 tension. What's the role of the bond market, I guess, when it comes to influencing the new Trump administration?

• 41:46Speaker 04

  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 10-year Treasury yield down when Treasuries rallied for, for the month of February and early March. Remember, President Trump said, oh, look, interest rates are lower now. That's what we're trying to do. Of course, we've sold off since then in March, part because of this, you know, 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 trillion and it

• 42:29Speaker 04

  still not being big enough 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 cost for the taxpayer. So I understand that President Trump really would like to see lower 10 year yields. But one way to do that is to actually issue less 10 year bonds, right? That's one way. But you 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 refunding report, probably right around the time that a lot of people listening to this on, it'll be on the

• 43:09Speaker 04

  25th of April. And next Wednesday, the Treasury Department will decide and Scott Besant and his appointees will decide how they're going to fund the deficit. And there's still going to be nearly a $2 trillion deficit this year. And he's going to have to issue 10 year treasuries. So I think that if there's not demand from overseas, if private investors lose faith in the US government and its ability to continue to finance the debt, that has to worry any administration, regardless of whether it's President Trump or President Biden or whomever.

• 43:41Tracy Alloway?

  All right, Ira, this is what we call a deliciously information data dense episode. So thank you so much for coming on Odd Lots. I'm so glad we could finally get you on the show, particularly at this exact moment in time.

• 43:55Joe Weisenthal?

  And thank you so much for taking my side and saying I was correct on the term premium. I really appreciate you coming on Odd Lots.

• 44:00Tracy Alloway?

  Lies, lies.

• 44:02Speaker 04

  Absolutely happy to be here.

• 44:16Joe Weisenthal?

  That's what I heard, Tracy. Didn't you say I was correct?

• 44:18Tracy Alloway?

  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, right?

• 44:36Joe Weisenthal?

  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 And why, for various regulatory reasons and other trade reasons, they had all these, what their balance sheets were. I love that idea that like it's the risk managers, not the risk takers driving the market. Very useful conversation on that front.

• 45:05Tracy Alloway?

  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 structural retreat in overseas 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 treasuries.

• 45:44Joe Weisenthal?

  Well, one thing that's really interesting, we're so we are recording this April 24th. 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 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 markets influence on the government. I certainly 100% agree with you that the government clearly wants

• 46:27Joe Weisenthal?

  lower yields and it doesn't like higher yields for all kinds of reasons. They've said it. They've said it. Scott Besson has said it. The only reason I don't like the term dollar vigilantes is I

• 46:36Tracy Alloway?

  Bond vigilantes.

• 46:37Joe Weisenthal?

  Bond vigilantes is that it prescribes a level of sort of like agency that I don't think is helpful in understanding.

• 46:44Tracy Alloway?

  Sure. We know like

• 46:46Joe Weisenthal?

  Yeah, well, that's why I just don't think this is why I don't like it as a descriptive frame.

• 46:52Tracy Alloway?

  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,

• 47:14Joe Weisenthal?

  Yeah.

• 47:14Tracy Alloway?

  you know, 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 US treasuries and affect change in certain policies. That would be interesting.

• 47:25Joe Weisenthal?

  That would be fun.

• 47:26Tracy Alloway?

  Anyway, shall we leave it there?

• 47:27Joe Weisenthal?

  Let's leave it there.

• 47:28Tracy Alloway?

  This has been another episode of the All Thoughts Podcast. I'm Tracy Alocke. You can follow me at Tracy Alocke.

• 47:33Joe Weisenthal?

  And I'm Joe Wasenthal. You can follow me at the Stalwart. Follow Ira Jersey. He's at Ira F. Jersey. Follow our producers, Carmen Rodriguez at Carmen Armin, Dashal Bennett at Dashbot, and Kale Brooks at KaleBrooks. For more Odd Lots content, go to Bloomberg.com/oddlots, where we have a daily newsletter and all of our episodes. And you can chat about all of these topics 24/7 in our Discord with fellow listeners, discord.gg/oddlots.

• 48:00Tracy Alloway?

  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 Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

• 48:53Speaker 07

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• 49:28Joe Weisenthal?

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