Zoltan Pozsar on What Just Happened with the Treasury Market

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)

So Joe, it's, well, there's been a bit of drama in the treasury market once again.

Joe Weisenthal (0:24)

Yeah, I noticed you got to do one of your Tracy Alloway signature things where you talk about a move that happened that's only supposed to happen like once every three billion years.

Tracy Alloway (0:35)

Yes, I love talking about those because it really gives everyone the opportunity to show that they've read Taleb's books by saying that the world isn't normally distributed. But of course, we did see some pretty big moves in the treasury market. So first of all, the 10-year yield jumped up to 1.6%. This was in the last week of February, but the really big move came in the five year. And I think that one had something like a seven or eight standard deviation move. You know, one of those things that's only supposed to happen in like 10 billion years kind of things.

And really, I know people make fun of standard deviations and sigma events, but really we're talking about the world's most liquid market.

And stuff like this keeps happening. This is, I think, the fourth big bout of treasury market chaos that we've had in just a couple of years. So I'm thinking back, we had one in, what was it, September 2019, we had repo madness. Then we had the March chaos in 2020 with the levered UST trades blowing up. And then we had a mini rates blowout in October 2020 And now we just had the most recent incident. So something is going on and clearly there is a persistent issue in the US treasury market.

Joe Weisenthal (1:56)

Yeah, there's a lot of things going on at once these days because there seems to be ongoing structural issues, questions about liquidity, which is weird in A, the world's most deep and liquid market and B, a market in which the Fed is actively supplying a lot of liquidity or very active in the market.

And then of course it's interacting with the economic situation and the policy situation because we have this Fed that said, we're not gonna raise rates until the economy hits these benchmarks and everyone's watching to see the Fed's credibility. We also have a very rapidly improving economy. We have people warning about inflation for the first time. So all kinds of things happening at once. But yes, to your point, the big action, we've seen rates at the long end, 10 year, 30 year yields have been rising for a while since the middle of last year, but it's really the action at the shorter end that's striking here.

Tracy Alloway (2:49)

Yeah. And of course one of the weird things about last week is you mentioned the economy, but we have this big tantrum in bond yields without a corresponding taper, I guess. So we kind of had a taperless tantrum because not that much changed last week. We didn't have fed speakers talking about rates rising or anything like that, but we have this huge move in the bond market. So a lot of focus on microstructure at the moment, a lot of focus on liquidity, ease of trading and the overall organization of the treasury market. And we have the perfect person to talk about all those things.

We're gonna be speaking with Zoltan Pozsar from Credit Suisse.

Joe Weisenthal (3:31)

I can't wait. Let's do it.

Tracy Alloway (3:33)

So Zoltan, I should say, in addition to being a strategist over at Credit Suisse has also been on the Odd Lots podcast multiple times.

So we will be getting you that tote bag any day now, Zoltan. Thank you so much for coming on again.

Zoltan Pozsar (3:48)

Thank you very much for having me.

Joe Weisenthal (3:50)

I should just say one more thing, which is that every time there's any volatility in the rates market, someone I.B.'s me.

It says, you guys gotta get Zoltan on again. It happens every time anything ticks higher on some screen of like overnight funding rates or whatever. They're like, when do you have Zoltan back on the episode? So this is a lot of requests for this one. Sorry, go on.

Tracy Alloway (4:13)

Okay, well, on that note, I mean, why don't we start out with a big question? So every time there's some sort of chaos in the rates market, Joe gets an IB asking for you to come on the show.

There have been a lot of those over the past couple of years. And as we were discussing, that's something you wouldn't necessarily expect for the world's most liquid market. So what's going on here? And why do we keep getting these sort of mini blowups in rates?