Josh Younger Explains Why the Bond Market Has Been So Volatile

Tracy Alloway (0:10)

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

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:15)

Joe, what's more volatile than cryptocurrencies at the moment?

Joe Weisenthal (0:22)

I don't know, wheat?

Tracy Alloway (0:25)

This is a trick question, because I think there are a number of things. But one thing that most people didn't expect up until recently was bonds, US government bonds.

Joe Weisenthal (0:34)

I don't think they've been as volatile as cryptocurrencies, but they have been volatile.

Tracy Alloway (0:38)

Now, wait a second.

Joe Weisenthal (0:39)

Oh, am I wrong?

Tracy Alloway (0:39)

There was a day where they actually were more volatile than Bitcoin, at least. And I think it was earlier this month after the Wall Street Journal released that article saying that the Fed might hike rates by 75 basis points.

And suddenly we had this big move in bond yields. And I think the 10-year US. Treasury, the yield on that jumped something like 28 basis points in a day, which was, I know you love this, a four standard deviation move. And the kind of thing that's only supposed to happen based on normal distributions like once in a century.

Joe Weisenthal (1:13)

Have you ever seen that tweet about the seem to lab breaking through the wall like the Kool-Aid man? Have you ever seen that tweet?

Tracy Alloway (1:20)

Every time someone says standard deviation. I'm not surprised.

Joe Weisenthal (1:25)

I'll find it for you.

Tracy Alloway (1:26)

Thank you.

Joe Weisenthal (1:26)

There's a really funny tweet about it anyway.

Tracy Alloway (1:28)

I will say.

Joe Weisenthal (1:29)

That was a wild day. I remember that Nick Timuros at the Wall Street Journal said they're gonna go 75 instead of 50 and everyone believed him.

And of course, he was right. And it was just this huge instant repricing of the entire curve, like really shocking.

Tracy Alloway (1:42)

Right. And so a four standard deviation move, make of that what you will, but Bitcoin's like move in the same period was something like 2.7 standard deviation. So we're talking about the market for US Treasury debt, which is one of the most, probably the most important market in the world. It's basically the risk-free asset against which all other assets are judged. And it's supposed to be the most liquid market in the world as well.

And yet it's having these big moves.

And this isn't the first time, right? I said a move that's only supposed to happen once in a century, but actually we see these moves relatively often. And of course we had the big blow up in yields in March of 2020 We had a big rally in yields in, I think it was 2014 We've had numerous other high-profile incidents where the market just seems to go nuts.

Joe Weisenthal (2:34)

In extreme periods of volatility, we do see this stress. And it's not supposed to happen, right? Like that's the whole idea here, which is that there are certain financial assets where, yeah, it's supposed to happen kind of. With treasuries, because they're theoretically risk-free and because say they can theoretically be, theoretically from an economic standpoint, be like equivalent to reserves or almost like cash at some point, the ultimate safe haven asset, they're supposed to just be that.

Like the one predictable thing, the sun around which the financial universe revolves around. And every once in a while, it doesn't happen and that's not good.

Tracy Alloway (3:13)

Yes, not good is a good way of putting it. The other thing that's happening at the moment is the Fed has started to unwind its massive balance sheet, right?

Joe Weisenthal (3:22)

Yeah, no, so it's like, again, another factor here.

Tracy Alloway (3:25)

Right, and that actually happened, I think they started unwinding in the same week where they raised interest rates by 75 basis points. So of course, no one actually noticed that this had started, but there's all these things going on in the market. It seems like we keep getting these dramatic events. So we really, we need to dig into it, don't we?

All right, we do actually have the perfect person to discuss. We are going to be speaking with Josh Younger.

He is currently a managing director and global head of asset liability management research and strategy at JPMorgan. He was previously doing sell side research at JPM, writing about interest rates and money markets, which I think was the last time we had him on. And I didn't know this, but he was previously an astrophysicist studying things like black holes and what happens when large objects collide against each other. So maybe the perfect analogy for the bond market.