How The Crisis Nearly Blew Up One Of The World’s Safest Trades

Tracy Alloway (0:11)

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

Joe Weisenthal (0:15)

And I'm Joe Weisenthal.

Tracy Alloway (0:17)

So Joe, I know there's a lot to talk about when it comes to the recent market turmoil, but I have to say, there is one thing that stands out to me, and that is what we've seen in the US. Treasury.

Joe Weisenthal (0:30)

Can I just back up for one second? I just had a thought. You know what would be funny when, well, I don't know if funny is exactly the right word here.

But it would be very interesting to compile a complete compendium of all of our podcast intros over the last couple months and through this as things get crazier and crazier, because I feel like in the beginning, it was like, well, let's talk a little bit about disruptions to the Chinese supply chain. And then we're at the point of, let's talk about how suddenly the safest asset in the world isn't trading like how it's supposed to be. And I feel like we could track the course of the entire crisis just by comparing our little intros here day after day. So maybe that's a project we'll do one day.

Tracy Alloway (1:19)

Yeah, definitely not funny, but probably noteworthy, that's for sure.

Joe Weisenthal (1:23)

That's funny, darkly funny maybe.

Tracy Alloway (1:26)

Yeah, I don't know why I'm laughing actually.

Okay, but you're exactly right, because the crazy thing about the big sell off in the treasury market, people complaining about a lack of liquidity in the treasury market, is that it is supposed to be the most liquid market in the world and a safe asset in times of turmoil. It's supposed to be cash like, and we haven't necessarily seen that over the past few weeks.

Joe Weisenthal (1:52)

Right, this is a very key and important thing to understand, which is that US treasuries, they have the full faith and credit of the United States in a normal stressful scenario. In a normal period where people were worried about the economy or worried about, you know, whatever worried about the financial system, because they are almost, they're essentially money, money that pays an interest rate, people tend to buy them and people tend to hoard them during dark times. But what we've seen in recent weeks is such an extreme dislocation and such extreme anxiety that even an asset that's arguably the safest asset in the world, US. Treasuries, has at times been gotten sold. Even at times it's perceived as not being safe enough.

And understanding why that is, the mechanics of our financial markets, or understanding why there have been periods of stress where they've gotten sold can really tell us a lot about the plumbing of the US financial system.

Tracy Alloway (2:55)

Well, I think the issue is not only have US. Treasuries sold off, but the actual selling process wasn't as smooth as many people might have expected. So for instance, we saw bid ask spreads in off the run Treasuries much, much higher than they would normally be, but even on the run securities were higher as well. And market depth basically across the Treasury curve really plunged all the way back, I think to the 2008 crisis lows.

And as we've discussed on previous episodes, the thing about US Treasuries is they're basically the funding market for everything in the global financial system.

So if you have trouble in Treasuries, if you have illiquidity and if you have a sell-off, then it can feed into all sorts of things, including financial conditions. And that's probably the way that it starts to affect the real economy as well. So we're gonna be talking about the US Treasury market, we're gonna be talking about plumbing issues, but the thing to keep in mind is that all of this really impacts the pain now being felt across Main Street.

Joe Weisenthal (4:04)

And I just want to, as we have to do these days, we didn't used to have to do it so much, but we always have to have this caveat in the beginning of every episode where we point out the exact date that we're recording this, because again, things can change so much by the time recording has happened, so the time people listen to it. We were recording this on Tuesday, March 24th.

And I also want to just point out the Fed has already done a number of things to ease some of this tension a little bit. So we'll talk a little bit more about what the breakdown was, what the Fed has already done to relieve some of these tensions we're seeing in the treasury market, in the funding market, and of course, whether it's enough and what that tells us about how the system works. But just again, whenever you're listening to this, Tuesday, March 24th, 9 a.m. Eastern time is when we're recording this.