How The Bond Market Changed During A Veteran Trader's Decades On Wall Street

and forced myself to learn about. They're all interesting topics, Joe, It's just I feel like I'm immediately on the back foot when we're doing poker or chess or anything like that, or sports and games in general. But it is true that you have one topic that you regularly like coming back to and always really enjoy. I'll let you. I'll

let you bring it up. Sure, alright. So the topic is the bond market, and specifically bond market structure, right, the history of the bond market, how it actually works. As we've explored in multiple post posts episodes on this podcast, it's very complicated and far more sort of uh, far more many structural issues arise that, say the stock market, which to some extent I think people get how the

stock market works. Yeah. So the analogy that people often use, at least when it comes to the corporate bond market is to say that it's it's kind of like the stock market in say THEES and that a lot of it still trades by appointment and over the phone. But on the other hand, you have the government bond market, the treasury market, and that has actually shifted to some electronic trading quite well, I don't know if you'd say rapidly,

but quite significantly. But then again, on the other hand, the credit market is still stubbornly old fashioned, pretty impressive in its own way. Yes, yeah, okay, so we know we're going to talk about that today, but what what are we going to talk about specifically? All right, Well, I'm really excited because to talk about the bond market, we've tapped someone who's been in the bond market for

decades and who works at Bloomberg. So probably well, I was gonna say, probably somebody who's seen a lot of changes, but per yourt changes, all right, Well, we'll have to ask him whether or not there have been any changes. So we're going to talk to Rob Elson. He is an analyst on Bloomberg First Word, and he covers the bond market day in and day out. Let's do it, Rob,

Thank you so much for joining us. Good morning. You know, I just introd you saying that you've been in the market for many decades now, but you had a kind of interesting career path into bonds. Is that the right way to put it? Um? Yes, after college, I went to law school for about twenty minutes and was immediately drafted.

Um the nanosecond after I dropped out. Um, So this would have been in the sixties seventies, right, It would have been in law school, and then seventy in the Army, the last year of which was an interesting year in Vietnam. And when I came back to the States after that, my college roommate who had legitimately I might had been four ha legitimately had been working in New York and then quit that I was traveling in Europe, got back to New York about the same time I did, and

he said, Hey, I've tried this work stuff. It's not such a big deal. I'm going across country. Want to come? And I figured well, better to do it before I start working. So we spent six thousand miles going across country somehow and wound up on a little island called Vashon in Puget Sound off the coast of Seattle. And that was a very interesting year. And after that I came back to New York and looked for a job.

One of the women I had went to college with had a connection at what was then First National City Bank, and I went in for an interview in the guy who was going to interview me wasn't available, and basically sat me down with a guy who had turned out was a treasury bond salesman. I'm sitting at his desk for about thirty seconds or a minute or so, his phone rings. Uh. He goes yep, yep, and looks across the trading room and yells to buddy you or whatever

the guy's name was at the time. Bid fifty six is for American Road, which was their code for Ford Motor Company back in those days. And the guy yelled the number back at him, and he repeated it into the phone and then sort of flicked his finger at the guy on the other side of the room and said yep, thanks very much and hung up the phone and I said, what just happened? And he said, I sold fifty million six month treasury bills to Ford Motor Company. And I said to myself, oh, I could do that.

As it turned out, I could, but you don't really get to be very good at until a year or two goes by. But you got the job, right. I got the job so real quickly. What strikes me already about this story is, you know, when I think of people trying to get into Wall Street these days, I think of people who for years have had the ambition of getting into Wall Street. Maybe they studied some business and some math and technical stuff and internship took all

kinds of sort of licensing. Like it seems like there's this model person who really tries to get it into finance and check all the boxes. And I get the impression from your story and other stories that we've heard at the time that it was definitely a bit more informal that people with more sort of unusual diverse backgrounds. And I'm saying that from a sort of experience and education standpoint could find their way in. Is that fair

to characterize it that way? It's absolutely correct. There was literally, I think one masters amongst the people that I worked with, and I think he had a master's and something like geology or something. There was no such thing as an NBA that anybody in the bond market knew anything about internships. The only introduction to this that I had was sitting at this guy's desk. I had no idea what the bond market was other than it was sort of like

the stock market, and that was it. U one of the fell those I worked with, and by the way, who was times I am working with again here at Bloomberg actually came out of a seminary, dropped out of a seminary and it became became a bound salesman, So very very different times. It was sort of you know, if you knew somebody who knew somebody to get you in the door, you had a shot at an interview

and then whatever happened happened. So what was trading actually like when you started and how did you find it? Was it hard or was it easy for you? I don't really remember, except to say that I think instinctively I knew that I didn't know anything, and so what I did when I started covering people who were real clients and had real experience and managed money and knew what they were doing. I wouldn't pretend that I knew

what I was doing. But if the first guy I spoke to in the morning said something something smart or what I took to be smart, I would rearrange it and repeat it to the second guy. And then the second guy would either agree or sometimes say no, that's not right because of x y Z. So I could go back to the first guy and say, well, what about x y Z? And slowly, slowly you begin to figure out what's important. And you know, when the FED does something, what does that mean? And it was just

a different world at that time. What were the characteristics of a good bond trader or a good bond salesman? What did the people who are really good at it versus the people who are sort of mediocre at adverse to people who are let go? What did those really top ones possessed? Question? And I have an interesting response. When I started as a trainee, it was unknown as to whether I would wind up in sales or trading.

And one day the head trader called me up on the trading desk and sat me down next to him, and you know, I picked up the phone and listened to his phone calls. And at one point he picked up a phone to one of the brokers and got a run of let's say, two year notes. And so the guy was saying, uh, fifteen sixteen twenty on the November's, on the November's, And the trader just said, uh, I'll buy the October's, sell the November's. And then he picked up a handful of tickets and tossed them to be

and said, write the tickets. And well, yes, I had been listening into the phone call. I really didn't pick up quickly enough to know what I was supposed to be buying and selling. And I think that was my holding my feet to the fire, and that was my test. And then I was in sales. The guys who were traders,

the good guys, they had some instinct about it. They they just knew in their fiber that something was getting overbought or oversold, the market was getting ahead of itself, or they could read that when a big portfolio came in and bored or sold something, they knew what was going to happen next. I don't think it was a skill that you could learn very easily. These guys really just did it from the gut and off the top of their heads, and in some cases were amazing money makers.

So Rob, I want to move on to the evolution of the bond market over the last few decades. But before we do, what's the most interesting or remarkable thing that happened to you during your career. Is there one sort of incident that stands out? I think it was seventy four. I had started in October of seventy one,

I think it was four. Interest rates were high, although not as high as they would go, and the Treasury would auction UH coupons where they had already set what the coupon was going to be, and so there were what came to be called the front nine and the back nine. Of course, everybody played golf in those days. In any event, I think it was the nines of seventy seven and the nine And we're at the morning meeting and I literally pounded on the conference room table

and I said, nobody's going to buy these. Everybody thinks they're gonna wait, and you're gonna get ten percent if we take a position in these. We're making a big mistake. Don't do it. I'm telling you, don't do it. And the boss looked at the senior salesman and said the end of the world speech, and that's what it was. And I gave them the information that things were so

bleak that nobody knew what was going to happen. And they went and bought as many as could at the time of both auctions, and the market went straight up, and yields dropped something like a hundred basis points, and it went up being a big home run for them. And I always try and remember that, particularly when I'm

looking at charts about where we are now. Interest rates have been going down for a very very long time, and and yes we're higher than we were, you know, from the old time lows, but still when you look at a long term chart, we have barely budged off the bottom. I think. I don't know whether they'll live to see it or not, but I think that one of these days, somewhere down the road, the FED will tighten in a way that will take the breadth away of market participants, and we will have a bear market

that will just amaze people. I don't think there are very many people left who really have ever seen a real bear market? Right, I was just going to point out for listeners who aren't aware that essentially bonds have been in a ball market now, you know, over thirty five years. I mean, there have been some ups and downs during that time, but for over three decades bonds have been in a ball market. So what does that mean.

I mean, if we do get you know, as you say, maybe it's a FED induced move, that it creates a real bear market, not like this little like sell off that we've had since last summer. What will be the ramifications from the fact that so many, so few people in the space these days have ever seen a bear market. Well, it's not just that they've never seen a bear market, it's also that the whole structure of the dealer can unity has changed. People have serious risk limits and serious

position limits. The banks obviously have capital requirements that were not in play over the years. So the question is do the big dealers have the ability to stand there and buy securities when they're going down by not one or two basis points, by perhaps five or ten basis points at a time. And I think that's a big question. Ultimately, in theory, the FED will have to be there is the buyer of last resort, or at least that was

how it used to be. I suppose we could ask the question, how many people are left at the fed um, the open market desk who really have had, you know, that experience. So is the issue with the market right now? On the one hand, you have the shrinking of the dealer balance sheets, their ability, their appetite to take risk. Supposedly a lot of people argue with that point, by the way, But at the same time, the way that bonds are traded hasn't really changed. You know, you still

need to pick up the phone to someone. You still need to put an order in. It's not like the stock market that's highly liquid, where you can just enter orders electronically. Is that the issue the dichotomy? Well, I think that the conversations between clients and dealers has diminished. Uh not for the big guys, um, the black Rocks and the Goldman's presumably still talk daily to each other. But for the vast majority of clients it's all electronic

mm hm. Electronic communication, you mean, and electronic trading. You don't call up Bob Elson anymore and say you bid fifty million two year notes. You know, you just do it on the screen and you hit the enter and you hit a bit. It's right there in front of you and you see a trade. Yeah. I was just going to ask about that. So obviously we talked about the sort of you know, the changing rates market and some of how different it is these days from a

technical standpoint. When did you start to see a change in the way bonds themselves were dealt? What kind of when did you start to notice this shift? And uh, what hasn't changed or what would you have expected to have changed by now that the industry is really holding out on tell rate. I think was the first screen, and I guess that was in the late mid to late seventies, maybe later than that. This is all all pre computer and pre Bloomberg. There was just nothing like

that after the world Bloomberg. Yes, I know, I know, and I will tell you that when I first started using Bloomberg and realized how much was there and how much could be there, I would send the message to Mr Bloomberg with the subject line being idea of the day, and he always picked up his own messages back then, and I'd say, you know, the money supply figures come out on Thursday. But by the way, dealer positions also come out, and you really should pick up dealer positions.

And lo and behold, one of his elves called and said, what are dealer positions? And how do I find them? And I drew him a little diagram and he figured it out, and there it is. There's a function in Bloomberg that I can take responsibility for. Everything had been on a personal level. Everything you spoke to good clients multiple times a day, and everything was done on the phone, and your word was your bond. Everything or a big percentage of things is now all done electronically with less

and less human contact. Is there? As I can tell, when we get to the bear market, will the dealers just turn off the machine and not show prices and not be able to be hit? And nobody knows. So what's the one piece of advice you have for treasury investors right now? Well, the one piece of advice for everybody always is take the high road and know what you know and know what you don't know, and don't

confuse the two. And I've always felt because of the way I was treated by senior people who had no business spending time with me because I didn't know what I was talking about. I always felt like that I owed it to the next group coming up, and so I've always tried to spend time mentoring, if you will, or at least helping out younger people, which is basically every everybody. Now, all right, Rob Elson, BFW Analysts, thank

you so much for joining us today. My pleasure. So, Joe, was that as interesting as poker or chest for you? I thought it was very interesting and probably we should do, you know, tilt this back towards a series of these. I really do like this topic, and I'm particularly fascinated by the cultural change aspect and the idea that the industry wasn't once is sort of I don't know. It strikes me a sort of conformist and everyone sort of

goes to the same path. And so hearing about Rob driving across the country and then living on an island off a Puget Sound for a year and then being able to move from that into the bond world, uh, sounds very cool and very much more positive vision than people going straight from prep school to their ivy league NBA. Yeah, you can't really imagine someone kind of wandering and off the Goldman and asking to be a bond salesman now.

And it's also interesting, you know, this idea of you know, we talked in the stock market, there's so much focus on passive management and everyone wants to you know, robo advisors and just set it and forget it. But that whole period hasn't really seen a bear market yet, so who knows if people are really going to stick with passive the next time there's like a true crash, And so very similar to what Rob was talking about, slightly different, but we really don't know how people are going to

behave when there's a true bond market. We just have no sell off. Yeah, that's absolutely right. And of course the bond market US treasury yields in particular underpin pretty much everything else in financial market, so you could see this massive repricing. Of course, people have been predicting it for a long time, so we might be we're still waiting. It could be in ten years from now when we're doing this, we could still be this podcast, which I'm

sure it will be in ten years. Of course, we might still be talking about this topic of when it comes All right, well, let's revisit it in what sounds good. Looking forward to it all right, I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe wi Isn't all You could follow me on Twitter at the Star Wars. Thanks for listening. The Year E