Why Foreign Investors Cooled On U.S. Debt

Tracy Alloway (0:10)

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)

Joe, you know what just happened?

Joe Weisenthal (0:20)

It's a very, very open-ended question, so. I know, I need to work on these interests, don't I?

Tell me what happened.

Tracy Alloway (0:29)

All right, so let's see. A couple weeks ago, it not only was the end of the first quarter, it was the end of March, it was also the end of the fiscal year for a lot of big Asia investors, specifically Japanese banks. I know that is the highlight of your calendar every year.

Joe Weisenthal (0:50)

Did you celebrate, do people out there do a fiscal New Year's celebration? I mean, I know there's a lot of finance out there in Hong Kong, and so is that a thing out there or is that just, it's not the same?

Tracy Alloway (1:04)

I confess that I didn't notice anyone celebrating more than usual. I did write a haiku on Twitter though, and my haiku, my haiku was about stress in the money markets, which is something that occasionally happens at quarter ends.

Joe Weisenthal (1:21)

That's been a thing lately, and people sort of in the final few days or the final week or couple weeks of the quarter, you start to hear people rumbling about, are we gonna see stress appearing in various money market and fixed income markets? And I feel like I don't have my head completely wrapped around why this keeps happening.

Tracy Alloway (1:43)

Ah, well then I know just the person who's gonna be able to help you with this. But yes, essentially, let's see, right before the year end, right before December 31st last year, we did see a bunch of people talking about funding stress in the money market, which is just about the biggest money market that you can think of. And then just at the end of the first quarter, we saw that yet again. So something is clearly happening in the market. At the same time, a big component of the money market, something that is often used as collateral for the money market, US. Treasuries are also undergoing massive, massive changes, some of which you might have picked up on in the US.

Joe Weisenthal (2:27)

Once again, I feel like this is an area in which I'm extremely weak on. Like a lot of the deep plumbing of the financial system, I wish I knew more about, and I'm optimistic that maybe I'll learn more after today's episode.

Tracy Alloway (2:43)

Joe, I know you know this. So you know the US. Treasury is selling basically a record amount of debt, right?

Joe Weisenthal (2:48)

Yes, I know, yes, yes, I'm aware of this part.

Tracy Alloway (2:49)

Thank you.

Joe Weisenthal (2:50)

Yes, I am aware.

Tracy Alloway (2:51)

Okay. Oh, phew, okay. So at the same time that the US. Treasury is selling a lot of debt, we have a bunch of changes sort of taking place in the underlying money market, and we're going to discuss all of those with someone who is really the foremost expert on this topic.

So I'm very pleased that our guest for this particular episode is Zoltan Pozsar. He's a strategist over at Credit Suisse. He's also a former US. Treasury advisor. So who better to talk about the massive changes underway, not only in money markets, but also in the US. Treasury market.

Zoltan, it's so good to have you on the show.

Zoltan Pozsar (3:26)

Thank you very much for having me.

Tracy Alloway (3:29)

So I sort of alluded to this in the intro, but we're going to be talking about money markets. And just to back up for Joe's benefit, obviously, can you tell us what is your concept of money markets? What are we talking about when we say the money market?

Joe Weisenthal (3:47)

Thank you. I'm glad you asked this and didn't skip over this question because I would have already-

Yes.

Zoltan Pozsar (3:53)

Money markets. I think in my interpretation, I think anything from overnight and intraday stuff out to, I would say, three months, and so that's the core of it.

And, you know, money markets are hierarchical and that shows up in, you know, the term aspect of it, the institutional aspect of it, the instrumental aspect of it, but I think the core of it is definitely all the flows that happen in the financial system three months and in.

Joe Weisenthal (4:24)

So very short-term funding.

Zoltan Pozsar (4:26)

Yep.

Tracy Alloway (4:28)

And the people who are buying and selling this short-term funding, they're basically rolling over it constantly, right, in the overnight market usually, or through the repo market where they sort of use the underlying securities as collateral to secure extra financing.