Apollo's Torsten Slok Talks Bonds, Monetary Policy

**SPEAKER_1** (0:02)
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**Romaine Bostick** (0:07)
And that does bring us to our top story for the hour, the direct intervention by the Treasury to control the costs of the $40 trillion US debt pile. The historical track record of such interventions are spotty. The two most recent successes, first the Treasury's repurchase in the early 2000s of about $67 billion of primarily longer dated bonds. It was a protracted operation that did actually push the 30 year yield down by about two percentage points from 6.7 to 4.6 over about a two year stretch. And then second, there was operation twist in 2011 That was a duration management scheme where the Fed, not the Treasury, bought $400 billion of longer term Treasuries, while selling an equal amount of short term debt.
Now, Besson's actions so far seem to be standalone independent, which is curious given that two years ago, he blasted his predecessor at the Treasury, Janet Yellen, for what he characterized as an attempt to re-engineer the world's largest bond market. But it's also curious timing for all of this as Fed Chair Kevin Warsh preps for his own communications moment, a Speech Friday at Jackson Hole, Wyoming, that ostensibly is supposed to be about some of the wonkier, more procedural matters out there. But no doubt there will be high attention as to whether Warsh is willing to formally aid in Besson's intervention and whether he'll actually offer a more detailed explanation of the path for Fed rates. Torsten Slok, he joins us right now. He's the Chief Economist over at Apollo and he joins us right now. And Torsten, I want to start first with Scott Besson.
What the Treasury is exactly trying to do and whether history might actually be at its side with regards to the potential effectiveness of some of this bond buying.

**Torsten Slok** (1:47)
Well, the first thing is that it really is three things. He started with a yen intervention that was pushing long rates down. Then he had the FEMA intervention, the 2 billion went to 4 billion, which also has been pushing rates down. And today we heard some talk about, well, maybe the Treasury general account will also be used to lower long-term interest rates. So there's almost a campaign from the Treasury here in an attempt to try to put a cloud over rates markets that is attempting to try to limit how much rates can be going up. So on their own, these initiatives have had, so far, a more limited effect. But the fact that this cloud is hanging over the market, that suddenly something could happen, especially if the TGA, the Treasury General Account for the Treasury and the Fed's account, the Treasury's account and the Fed is being used, that could potentially have a bigger impact.

**Romaine Bostick** (2:33)
Well, when we talk about the bigger impact though, I would assume the number, the dollar figure, has to get a little bit bigger than just two to four billion or whatever he said he might go up to here. I mean, is there a number that you look at where you think that A would have an impact, more importantly, a lasting impact?

**Torsten Slok** (2:46)
Yeah, that's why today's news about the Treasury General Account, which really is the Treasury's checking account at the Federal Reserve, that has more than $900 billion in it at the moment, and that could potentially be a much bigger impact on the market because the threat of using as much as hundreds of billions of dollars on buying long rates could potentially have some implications, but that being said, a checking account always needs to be refilled with new issuance, so in that sense, it's really more the threat of this happening at some point that is having the biggest impact.

**Romaine Bostick** (3:17)
Well, that's what I'm curious about too, is that would you even need to tap that? Because I mean, I think back to when the ECB did something similar, and they never actually made good on it because they didn't have to. It was just the idea that they said they would do it if necessary, was enough to scare the market into sort of towing the line.

**Torsten Slok** (3:32)
That's exactly right. So that's why it really ultimately is very similar to currency intervention from a central bank. If you say as a central bank that we may step in and do something, we may stay in and buy or sell our own currency, then that on its own could also be a very important factor when you think about the risk that this as a headline could potentially begin to weigh, in this case, on rates and potentially suddenly create a drop in yields because of the Treasury deciding to do something. So that is probably was shaking out some of the people who are now betting on rates moving higher.