What's Behind the Big Surge in US Government Bond Yields

**Joe Weisenthal** (0:03)
Hello, Odd Lots listeners, I'm Joe Weisenthal.

**Tracy Alloway** (0:06)
And I'm Tracy Alloway.

**Joe Weisenthal** (0:07)
We're the hosts of the Odd Lots podcast, and we've got something exciting for you.

**Tracy Alloway** (0:11)
That's right. So one of the best parts of hosting our podcast is we get to actually meet and interact with our listeners. And we know we have some listeners over in Los Angeles.

**Joe Weisenthal** (0:21)
That's right. So if you're in LA, we're going to be recording a live show, some live recordings at the Vermont Theater in Hollywood on September 17th.

**Tracy Alloway** (0:30)
We have some really exciting guests lined up, have some really great conversations planned. So go ahead and get your tickets. You can find those over at bloomberg.com/oddlots, or click the link below in the show notes and come and say hi when you're there.

**Joe Weisenthal** (0:49)
Bloomberg Audio Studios, podcasts, radio, news.

**Tracy Alloway** (1:04)
Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

**Joe Weisenthal** (1:08)
And I'm Joe Weisenthal.

**Tracy Alloway** (1:10)
Well, Joe, we are still at Jackson Hole. Yeah. Where the official theme of this year's symposium is financial innovation in payments. However, the unofficial theme has to be what the heck is going on with bond yields and the Federal Reserve, because this whole meeting is coming against a backdrop of higher yields, particularly at the long end. A new Fed chair seems to want to make a mark on the Fed and has started all of these different task forces to look at things like comms and balance sheets.
And then, of course, we also have a Fed that seems to kind of maybe be operating at cross currents to the US Treasury, given that the Treasury is now buying back longer dated bonds and seemingly suppressing longer dated yields.

**Joe Weisenthal** (1:52)
There's so many different dimensions to what you described, right? So there is the formal technical thing. There is the sort of relationship between the Fed and the Treasury. There is the new things going on inside the Fed. There is obviously the warmth in the economy. By the way, the sun just came out. We're recording outside. It has been rainy and cool all day. Now it suddenly got hot again. Maybe that's a sign. Anyway, that's why it's fun to be in Jackson Hole, though. There are all kinds of different people we can talk to, including people who sit perfectly at this intersection of all the things that we're talking about.

**Tracy Alloway** (2:25)
That's exactly what I was going to say. The guest for today, truly the perfect guest, someone who's able to synthesize the macro and what's going on in the bond market as well as some of the operations of the actual Treasury market. Truly the perfect guest. We're going to be speaking with Darrell Duffie. He is, of course, professor of finance over at Stanford University.
Darrell, thank you so much for coming back on Odd Lots.

**Darrell Duffie** (2:47)
Tracy, Joe, great to be back. Thank you.

**Tracy Alloway** (2:49)
Is there a connection between higher bond yields and the payment system? Basically, why are you here?

**Darrell Duffie** (2:56)
Well, there can be. In March of 2020, when the markets became dysfunctional, the Fed had to step in and dig out the balance sheets of the largest dealers to keep the bond market moving, and bond yields jumped and were very volatile.

**Joe Weisenthal** (3:10)
The last time we talked was also at Jackson Hole, and we talked about this relationship between just the sheer volume of public debt that's traded these days, and the scarce dealer balance sheet.
Often when people talk about the size of the debt, they talk about maybe debt to GDP or something like that or whatever. This is what you focused on then, and some of your work takes it from a different angle. Yes, talk about the volume, but just the pipes that we have to run it through.

**Darrell Duffie** (3:39)
That's right. After that event in 2020, I said it would happen again, but even with the massive amounts of trading we're seeing today, the dealers have more space yet. Could be capital regulations are not as strong, could be the dealers have recapitalized, but they're definitely in force.

**Tracy Alloway** (4:01)
I definitely want to talk more about that, but just on a basic level, when you look at yields on something like the 30 or above 5 percent, I know they've come in slightly today following the chairman's speech, but when you see a yield at that level, what do you think? What is it telling you?

**Darrell Duffie** (4:17)