Why Treasury Market Spasms That Shouldn't Happen Keep Happening

Tracy Alloway (0:10)

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

Joe Weisenthal (0:16)

And I'm Joe Weisenthal.

Tracy Alloway (0:18)

Joe, do you ever think about US. Treasuries?

Joe Weisenthal (0:21)

Yeah, every day. That's like, unironically, first thing, get up in the morning, think about Treasuries. Absolutely.

Tracy Alloway (0:30)

I mean, Treasuries are sort of the thing that the entire market is revolving around at the moment. Like, there's so many things that are correlated with yields.

But I guess, let me frame that question a bit differently. Do you ever think about what a Treasury actually is?

Joe Weisenthal (0:45)

Yeah. I mean, I don't have as strong intuitions about it, but I kind of feel that, yeah, I do. But I'm always up for learning more.

Tracy Alloway (0:55)

Yeah. Well, that's what we're gonna be doing in this episode. And I think it's an important topic. I mean, it's obviously an important topic, but one of the reasons it's worth looking into is because I think most people tend to think of a US. Treasury as, you know, it's a bond issued by the US government.

It's unlikely to default. It acts as a sort of safe asset in the financial system.

There's one other aspect of US. Treasuries that doesn't get as much attention. And that's the fact that it's supposed to be this huge and liquid market that's really easy to trade.

Joe Weisenthal (1:34)

Yeah, I mean, so you asked what is a Treasury and how I think about it. And on some level, I really do think it's almost like, it's like the fundamental building block of the entire global financial system. It is the deepest market. It is the most liquid market. It has no credit risk for the most part. And so the price, there's like a purity to the price. But as liquid as it is, every once in a while, and despite the fact that it should be like the simplest thing to trade, every once in a while, it kind of breaks in this weird way and nothing ever good happens if the Treasury market is breaking.

Tracy Alloway (2:12)

Yeah, that's right. So we've had these big moments of disruption in the Treasury market recently. We had, well, the big one was the March mayhem in the market when a bunch of levered trades blew up. But most recently we had the yield spike in February and way before that we had the repo madness in September, I think it was 2019

And then we had the flash crash in US. Treasuries back in 2014, although-

Joe Weisenthal (2:43)

I think it was 2015

Tracy Alloway (2:44)

2015?

Joe Weisenthal (2:46)

No, maybe, I don't know, something around there.

Tracy Alloway (2:47)

I should say up crash because yields went down. Yeah, okay. But the point is that these sort of disruptions keep happening and they're happening in a really important market, as you said, and in a market that's supposed to be liquid and easy to trade, and yet it seems to be seizing up every once in a while.

So that's what we're gonna talk about today.

Joe Weisenthal (3:07)

Great, I can't wait. No, it's a fascinating question because why the safest, most liquid asset in the world, which in theory, the Federal Reserve could, stands ready to buy, in theory, at any moment, why it should ever seize up, is sort of this mystery to me. I don't quite get why it should ever happen, but it clearly happens enough that something's going on.

Tracy Alloway (3:29)

A $21 trillion mystery, yes.

All right, well, we have the, that's the size of the US. Treasury market, by the way. We have the perfect person to discuss all of this. Our guest for this episode is Yesha Yadav. She's a professor of law over at Vanderbilt Law School, and she's done a ton of research on exactly this topic. So Yesha, welcome to the show.

Yesha Yadav (3:53)

Tracy and Joe, thank you so very much for having me. It's such a pleasure to be here, and particularly to get to talk to you about US.

Treasury markets. What can be more exciting than that?

Joe Weisenthal (4:02)

Nothing.

Yesha Yadav (4:03)

Exactly.

Joe Weisenthal (4:03)

Nothing could be more exciting.

Tracy Alloway (4:07)

All right, so maybe just to begin with, I mean, I just listed some recent, let's say, conniptions in the US. Treasury market. It feels to me like these are happening more often, but I haven't gone back and looked throughout all of the market's history.

Is that right? Do you think this sort of random bouts of volatility is happening more often?