The Greatest Ever Panel on the World's Most Important Market

Nellie Liang (0:02)

Bloomberg Audio Studios, podcasts, radio, news.

Tracy Alloway (0:18)

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

Joe Weisenthal (0:23)

And I'm Joe Weisenthal.

Tracy Alloway (0:24)

So what you are about to hear has the very, very modest title of the best ever panel on the world's most important market. That is the US Treasury market, of course. This was recorded live at our New York event on June 26th.

Joe Weisenthal (0:40)

That's right. We had our recent Odd Lots live event in New York, and there's so much going on in the Treasury markets. There's questions about rates, there's questions about foreign demand, there's questions about liquidity and the capacity of existing Treasury market infrastructure to handle all of the volume of debt out there. So we wanted together some of our favored people to actually understand what's going on.

Tracy Alloway (1:00)

Yep. Who's going to buy all the bonds? And we did indeed have an absolutely amazing panel. So we had Nellie Liang. She is a senior fellow over at the Brookings Institution. She is also the former undersecretary of the Treasury for Domestic Finance. We had Ira Jersey, who you might remember from a previous episode. He is the chief US interest rate strategist over at Bloomberg Intelligence. And finally, we had an Odd Lots favorite, Josh Younger. He is a lecturer at Columbia University, among many other things. So we hope you enjoy. Take a listen.

Joe Weisenthal (1:34)

So is anyone worried about who's going to buy the debt?

Josh Younger (1:39)

Who goes first for that one?

Ira Jersey (1:41)

Well, I mean, I guess I'll start.

I'm not worried about who's going to buy the debt. You know, when we think about markets generally, and especially markets for sovereign debt of large countries that are relatively liquid, there will be a buyer. Now, the price might change. And I think that's one of the things we have seen somewhat in recent weeks when you have somewhat of a slowing economy in the US, you certainly see like two-year yields have actually gone down, you know, a better part of 50 basis points over the near term. But the long end hasn't done very much at all. And I think that that is at least in part an indication that there are some people who were a little bit scared to buy that debt without having some type of premium put onto it. So it'll get bought. The question is at what price? And that's different, right? Like, I'm an investment strategist. I'm not a policymaker, right? And I think that there's some people who kind of messed that up with what like our job is. When Nellie was at the Treasury Department, she had a much different view of the world that she had to do as opposed to what we do as investors.

Tracy Alloway (2:47)

Well, I mean, on that note, it is true that we have more, I would say, price sensitive buyers in the market than we used to, right? So we used to have a lot of central banks, a lot of sovereign wealth funds. They're still there. But compared to domestic buyers, retail, like that has grown a lot more. Nellie, does that change the way you think about debt versus, you know, some years ago?

Nellie Liang (3:09)

Absolutely. So it said prices will adjust. There will be a buyer. But it used to be decades ago, we just had a much more stable investor base, central banks, foreign funds.

Now it's like the non-bank, what we would call the non-bank financial institutions. It's hedge funds for various reasons, private funds who use treasuries for liquidity risk management. So the minute things get volatile, they'll want to sell treasuries to help manage their own positions. And so the investor base has changed. There will be buyers, but it could change the price and change the way prices fluctuate. There's just going to be much more volatility given the changing investor base. And that's something that treasury, who has to issue the debt regularly, we, when I was at treasury, probably 250 auctions a year, they think about that. And it does affect how you think about bills versus longer term coupons and all that.

Josh Younger (4:15)

I guess I would, it's different when you're saying the same thing. I should start with, I thought I'd get away from disclaimers when I left the Fed, but I have to say, a disclaimer, which is this is not investment advice and I work for a big place that has lots of positions and nothing I say should implicate what positions we may have or not have. That said, I think it's a similar way to ask the question is why are they buying the debt? Because the market is going to clear at a price. We may or may not like that price, but prices used to fluctuate all over time for various reasons. I mean, during the Civil War, we had a captive demand base because if you wanted to be a bank, you had to buy Treasuries and yet the price moved. So for me, are you buying a security to hedge a liability that is of similar duration to the thing you're buying? Are you in it for the long haul? A classic example is like a life insurance company, which has very long-term longevity index, is the term of our right. It's like, as long as you people are alive, there's going to be life insurance companies have to buy debt of similar length and they're going to be very stable. They might be price-sensitive, but probably less so, and at the end of the day, they have this liability that has to get funded. Banks, to the same extent, have these very long-term liabilities. These deposits are long-term liabilities, as we talked about that on one of the episodes. So they need long-term assets to hedge long-term liabilities because you all have bank accounts, you can get your money back whenever you want, but you tend not to. So that's a long-term liability. A hedge fund is not in it for 10 years because that is not the nature of the business. They are responding to price signals and relative value Treasury trading is really just a response to price signals where the market is attempting to find the lowest cost buyer. There's this great book from the 19th century, which is inspiration for Friedman. I'm not a Friedman knight, but it's an interesting story, which is called Feeding Paris, which is by Bastiat and a French economist. He was saying if one person was responsible for feeding Paris, everyone would die because it's impossible to feed a million people if you're making all these decisions on your own. So price signals get the food to where it has to go, when it has to go there. And so the miracle of the price mechanism is the fact that Paris wakes up every morning and has food to eat. And it's still true.