Why the True Price of a Bond Can Still Be Hard To Know

some stuff going on. Yeah, we're gonna try to fix the imbalance of of attention. In this episode. We're going to get very very um technical and a little bit wonky and take a look at not just credit as you mentioned, corporate bonds, but um, we'll also look at

things like US treasuries. Um, what's going on there? So I should just say, as we're recording this episode, I was just looking at the yield on the thirty year and that's getting up to almost two per cent, which is a nice round number that people like to focus on. But the question, of course, is when we talk about bond yields, when we talk about bond prices, what exactly are we talking about. None of these trade on an exchange, So where does that pricing information come from? Yeah, this

is always a fascinating question. We've discussed it in various forms a few times with Chris White as as well as others. Which is just this idea that Okay, everyone can look up on their monitor and see a quote for the say, um, you know, price of Microsoft shares, and we know where that comes from, and there's sort

of like some sort of central repository for that. But in the world of fixed income, whether it's a sort of credit or rates, pricing is at a minimum much more distributed across all different kinds of platforms, all different kinds of players. In the idea that they're just sort of like one agreed upon price is um, it's not as much of a thing at all. Yeah, that's exactly right.

And it's the kind of thing that people don't tend to talk about unless something bad is happening in the market, at which point suddenly everyone starts talking about bond pricing and what exactly, um, the process is there. And we saw a little bit of that in during the big market sell off. Of course, we had a lot of turmoil in credit. We also had a lot of turmoil in the U. S. Treasury market, and that's when people started talking about discrepancies in bond prices, which is it's

never a good sign, is it. Uh No, it's like basically, you know, with all these things, it's like, once you have to start learning, by the time you're learning about how something actually works, usually that means trouble him. Yeah, exactly. So okay, yes, So today, um, we're going to be diving into the topic of bond pricing and we're gonna be talking to the authors of a paper that came out in January, a really really interesting paper by morning Star.

It's called Bond Pricing Agreeing to Disagree and uh basically the authors on that crunched a bunch of numbers to really look at how different funds are pricing bonds and the discrepancies that are going on. So really interesting. Um So, without further ado, then let's bring on Eric Jacobson. He's a fixed income strategist at morning Star, and we'll bring on his co author as well, match Up Kawara. Thank you both for coming on, glad to be with you,

thanks for having us. So, I guess first things first, but you know, Joe and I were joking a bit about how people don't tend to look at the technicals of bond pricing unless things are going wrong. What prompted you to do the paper? Well, there are a few things I think, you know, I hate to use the cliche that that crises are an opportunity, but when you're in the when you when you look at bond bonds and bond funds, the most exciting stuff always happens when

something goes wrong. And that's really what happened as usual in in March, and we started thinking about what we might see in the data at that period of time. And there's a relatively new filing that is required by the SEC called MPort, which is really an electronic version of a portfolio filing, essentially almost the same as an annual report UM, but for you know, reasons that most

people wouldn't really care about. Having it digitized makes a huge difference in being able to deal with the data. And so it gave us an opportunity, because obviously we

collect that stuff across the industry. UM, it gave us an opportunity to pull some of the data that was that we knew would be very clean or as clean as we could imagine it to be given how it's submitted to the SEC and look at how different firms price their bonds at the end of a particular day, which you know, it's been possible to do that in the past, but as I just sort of alluded about the filing issue, it would have been it was a lot more difficult and a lot more difficult to do

knowing for sure that the that the data was going to be filed consistently. So, uh, you know, unfortunately a very bad time in the market for a lot of people, third quarter at the end of the first quarter, but not a terrible time to do research. So what was your most striking finding in terms of the different prices that can emerge on the same security, the same bond, and the different approaches that a different holder took in

their prices. Sure, so, you know, the first thing I would say is that we did not expect to see prices sort of on top of each other perfectly aligned. For some of the is I think that that you guys alluded to, But you know, some of it is just sort of structural in the sense of when when bond portfolios are marked, they're marked at the end of the day, and it's handled in slightly different ways depending on the firm that's doing it and some of the

decisions that they make about pricing. So one of them is simply what time of day, and you can price bond portfolios that either three o'clock or flour o'clock. It seems that there's a lot more consistently, and there used to be a lot more firms are doing at three o'clock hour, but there is some diversity in that they also have the option of choosing to price either at the bid or the ask or the mid and so

that's just another layer of difference there. And most firms are also, well pretty much all the firms that we know of a all use third party pricing services. And so then you add to add to the fact that there are a multitude, not not a huge number, but there are different services. So once you get through all three of those lenses, it's certainly posible for prices to be somewhat different. And you know, I think that the key issue here, I think you guys were talking before

about the end of day price for a stock. Part of the reason for this that we have this issue is that um even if you are able to observe a price, you know, at two o'clock in the afternoon for a particular bond, and it's recorded by FINNRA, that's the regulator, and it's disseminated through trace, which is a

reporting system. If that's not the price, if if that trade doesn't happen anywhere near the close of the market, then the somebody has to look at what that bond and say, well, this is what the price should have been at the end of the day, because the market shifted between the last trade and now, and we really need to change the price to reflect that. And that's part of you know, where you get all this difference.

Of course, as we mentioned in the paper, there are lots of bonds that don't trade at all in a single day either, so that complicates things as well. Finally, I would say there's always a possibility that that the asset amount you can challenge the price that comes from from pricing service. So that's that as another layer of complexity. You know that they they may think that they know the real value of that bond better than the pricing agency,

which which is quite conceivably true. If one manager challenges the bond and another firm doesn't, then you know, prices might look different for that reason as well. Can you talk a little bit more about the third party pricing services, because I think this is sort of whenever people hear about this UM for the first time, I think it's difficult for a lot of people to get their heads around that there are actually companies out there whose job

is to kind of triangulate the price of a corporate bond. Sure, so it's interesting because you know, people will sometimes ask, you know, why wouldn't you just price the bond yourself if you're a manager, and as much it just eluded maybe in some cases a bond that's not widely held, maybe the manager it knows even more about it. The

pricing service. You know that the truth is is that we've evolved into this system because the goal is to have a third party or an arms length party, if you will, UM making those pricing determinations, to sort of remove the manager a step away from that decision. Since the decision that the manager, the decision that's made on that price can affect the performance of an account that a manager is running, and so forth. And it's the

kind of thing that has evolved over the years. Um, I haven't been involved in bond pricing directly, so it's uh, you know, I don't have the full history of the industry at my fingertips, but I can tell you that pricing has historically a lot of that information has come from broker dealers themselves, so uh, and even today, the pricing services do talk to the broke dealers, and there are pricing services that are associated on some cases with broker dealers as well, so it's kind of a mix there.

But you know, the idea is that, um, when you have a portfolio of you know, a hundred and fifty different bonds or maybe a thousand when you're talking about mortgages are a very large mutual fund, you need to be able to gather market information very very quickly in order to that kind of pricing. So it makes sense

to have a third party do it. And one of the advantages of having an agency that's that's sort of independent is that they can be in touch with multiple dealers, they can take in all the data feeds, and they also have systems in place so that, um, if there isn't any really fresh information, but they have a signpost of some kind to work off of for example, you know that the bond has this level of maturity, you know that it has this credit rating, it's in this sector,

and etcetera. You can sort of triangulate a prices. I think someone said, um, they use a lot of different tools for that. Some of them are now they're starting to use AI for some of that stuff. But the idea of fundamentally is to try and get that to

be as dispassionate as as decision as possible. UM. And you know, one of the things that we talked about in the paper is one of the reasons that you have some differentiation aside from the other factors, is that there are a good handful of pricing services, and some firms may use a single service for everything, but most of the larger mutual fund managers that most people are invested with, UH pick and choose among the services depending

on the asset class that they're that they're using. And then UH and so, for example, you know, if they are looking at one particular kind of mortgage bond for a private mortgage security, the kind that blew up during a crisis, they may use a single pricing service just for that and use somebody else for for all the other sectors, So you know, this comes up every once

in a while. Obviously, Q one of last year was one time, I forget, what is it, tracy, when were we talking about like energy bonds in the junk bond E t F like years ago. I feel like that was late, I want to say, although, yeah, I think it happened. No, I think, but I want so yeah, yeah, I think it was late. And I know there's like a bunch there's like an oil crash or a bunch

of junk bond E t F got dislocated. Hasn't really been a problem yet, this question of ambiguous bond pricing of instruments that don't trade, because I know there's all these questions that emerge about the sort of liquidity mismatch where the bonds don't really move, but the E t F that or the funds that own the bonds have to provide daily prices or even intramarket daily liquidity. How big of an issue is this because so far it seems like mostly the infrastructure has work. Yeah, I think.

You know, one of the benefits of the mutual fund structure in particular is that you know a lot of these differences get kind of washed out on a large portfolio. So even in a mutual fund that you know that has truly billions and billions of dollars, even if there are a good handful of bonds where the pricing seems to be all over the map, you know, when you when you add all that up and average it out, they turn out to be kind of rounding errors in

a lot of cases. UM we still have some research to do on that, because we haven't gone through the entire universe and done it at the fund by fund level, but that seems to be the case for the most part. You know. The big problem, as you alluded though, is when you wind up in a big crisis situation, and the more concentrated a portfolio, and the worst the crisis and the longer at last, the bigger problem that can be. And of course you know this isn't exclusive to bonds.

It doesn't happen, you don't notice it nearly as often with equities, but that you alluded to earlier, you know, if you have private placements in a mutual fund or you know, very very large slugs of a of a private company that's spread around UM, and and that happens you know, often with with young uh startup companies, where small cap funds get involved, why to put big tech names?

There can be disagreements about things like that too. Usually it's not that big a deal to small investors when you have diversified funds um But as I said, crisis last lasts long enough, or you have a concentrated enough portfolio, that's when it really starts to make a difference. So can we talk about that a little bit more in

your paper? What exactly what was the difference in bond pricing differences in normal times versus something like the first quarter of twenty twenty, because I think your study looked at late which was a relatively calm period in markets, and then the end of March. So what was the

difference between those two periods? Sure, so, as you alluded, we we started in September, and just to clarify, you know, we used quarter end data and so this was essentially data on the last day of the quarter, at the end of the day and looked across funds and across bonds that were appearing in more than one fund. Well, this is kind of a nuanced in and of itself.

But when I say more than one. What I really mean is more than one firms funds because each firm, no matter how many funds they have, if they own the same bond across multiple funds, the structure is to price them all at the same price. So when we talk about this, we talked about how many firms priced the bond, and that appear in the portfolios we looked

at um. But when you go back to September, for example, as you asked, if you take corporate high quality, corporate bronze, but corporate brons in generalist, essentially, the differences in price were fairly narrow. We use a term that we call the price spread percentage, where we took the lowest price and the highest price that we found, and then we took that the difference between those two and we divided it by the mean average, and that gave us this

price spread percentage. And so if you look at triple A and double A bonds at the end of September UM that number was very small. It was only about thirty basis points for double and triple A and it got you know, a triple B was point three seven, so pretty small. Those numbers are still meaningful in the in the framework of um. You know a market where returns for a whole year, you know, the yield on on bonds, as you just mentioned earlier, the thirty year

not quite even two. That's a meaningful number, but it's it's within the realm of expectations given all the things that we said earlier about prices, and then they do tend to get a little bit wider. The the thinner the market, lower the quality, the smaller the range of values and the bonds part of me what I mean to say is, you know, the high yield market is many times smaller, for example, than the investment grade corporate market, and so you expect more dispersion there, and that's what

you saw at that point. And then, of course, by contrast, when we looked at the end of the first quarter, of those numbers were in some cases multiples. So I mentioned earlier thirty basis points for the price fred percentage for triple A double A corporates at the end of March was one, and then the number for triple B bonds was two points seven two percent, so literally multiples of what we saw at that point. Just another snapshot in time. Your thoughts on this sort of significance of

these figures are what they imply. As Eric said, especially in the in the in the crisis mode, these differences were way bigger than we expected. One thing that I would maybe want to mention is that, you know, I remember this old paper that Fisher Black of the famous um you know Black and shows formula. You wrote this paper at some point, I forget what exact name of seven is called noise, And this is kind of what we're dealing with here a little bit. You know, the

bond prices are noisy. You know, they are not perfect. We don't know for sure what a given bond is it's worth, and that's what we see being here. So on the plot positive side, um, you know. Fisher Black asked the question, you know, when would you say that the market is efficient? And as the answer was, if if there is some kind of a true value which we don't know about, but let's assume that it is there.

Fisher Black said that the market will be efficient if if the the market is efficient if it will assign a price within the factor of two of the real unobservable true value. So if if something is something let's say is is is there's an instrument who's true values let's say a hundred then Fisher Black would say that the market is efficient if if if it assigns at the value of somewhere between fifty and two hundred um.

That was his definition. So what we see here, you know this is these are these are fractions of of what official Black thoughts might still constitute an efficient market. So in that sense, we are not seeing anything critical here. On the other hand, as I mentioned, if you see attempt percentage point price differential between between bonds, that that can well be like two years worth a yield for some events, for high yield issue, right, so that is

a potential, uh, you know, point of concern. Um, I'm not sure what solution to this problem might be. Nothing obvious count comes to mind. If we don't want to end up with just one pricing service, we don't probably want the government to dictate what that price is. So I think we are stuck with the system that that we have here. Let's just hope it continues to function

reasonably well. One thing that Eric probably didn't highlight, so our sample that we are dealing with, we are only dealing with bonds that had at least two different firms pricing it. Now, it turns out that this is in many cases the minority of all the bonds. Most of the bonds that we are dealing with in these sectors and especially in the municipal market, they are owned only

by one firm. So we don't really know. We can't you know, you have only one price that you can't talk about how spread out that price is, right, but that that seems to be that seems to be more of a norm than one would expect. So we're kind of dealing with these two issues. One is only one one player owns a given bonds and secondly, what Eric mentions, these bonds oftentimes go through long periods of not being traded at all, So so how do you a sign

a price to what? Instruments like that? Though I don't remember, we were talking to somebody from a who came from a big firm, and he was telling us that this was in the context of of some emerging market paper. You know, they had to put a price on it. Says this bond hasn't traded for seven years. Now, who really knows what it's worth, So we're going to just say that it's worth seventy dollars and it's going to

be done with it. Wow. So I know we're talking about how especially when when you look at something like new knees or something like corporate bonds where they really aren't trading that regularly, there's a tendency to say, well, this isn't the fact that there are pricing discrepancies, isn't that worrying? And they tend to get sort of normalized in the long term and everything kind of works out.

But one thing that was really surprising in your paper was that you also found price discrepancies in treasuries during the worst of the market sell off in And this is supposed to be, you know, a huge and liquid and standardized market, and yet in March of last year, people seem to have difficulty agreeing what US government debt was actually worth. Um, can you walk us through your findings? And then also, I guess your thoughts around this, like,

how could that possibly have happened? Sure, so what you said is right on. You know, we we when you look at the data for the end of the third quarter of UM, the differences were very very small. Um. You know, anyone looking at our charts, we'll see that there are cases where there are these outliers that show up in the data, and you know, we've audited a number them and found that it's the data. We the

representation that we came up with its accurate. But there were certainly a handful of cases where we think that firms were actually reporting the information incorrectly, but you know, we didn't we didn't strip that out if we knew that the data that we were using the right data. But when you look down at the at the intercuartile ranges as we as we picked them out, So in other words, sort of the the concentration of bonds for the most part in the middle that it was a

very very narrow band at the end of September. Then when you got to the end of the first quarter, there were pricing differences that went not quite to a full percentage point, but just under that. And as you said, that's that's pretty remarkable. Um. You know, the reasons for that are kind of all over the map a little bit in terms of um, you know, some of this was covered pretty widely in the press in terms of

off the run securities and what have you. UM, But the bottom line I think is that it really it really made a strong case that it was important that that UM that the FED stepped in when they did and made the decision that did, because you can only imagine, you know, we saw much wider differences for other sectors. UM. You can only imagine how much worse it would have been and would have potentially gotten if they hadn't gotten.

And I'm sorry much it where you're gonna add something, No, no, no no, no no, because the fact that I was just leading up to the same timp but you said

it already. I mean, the Thud was really worried about what was happening, even in the you know, the treasuries are supposed to be the gold standard trading much and I don't trade bonds ourselves, but you know, we've definitely heard observations that there were certain bonds at certain times of the day during that period where people were seeing UM spreads that were unheard of from anything they had

seen before. And as much as said that was that was you know, again, however you want to frame it, I mean, I think we were all very fortunate that the that was was awakened at the switch when that happened, because as bad as that is for the treasuring market. The implications down the way from that are just huge. I think hopefully the average person on the street that doesn't read, you know, the financial papers, probably didn't even

notice it. But if it had gotten to that point, we really would have been in a real best trip. H Well, one other thing that maybe should have mentioned that It just occurred to me recently that you know, I've given what we are seeing with these prices, what is the row of quantitative approaches and fixed income? That's kind of began to worry me a little bit. If you don't really know what the prices of something, how

you're trying to arbitract some differences between these mombs. So I'm sure that people who do this have thought about it, but I haven't, and I don't know how they are dealing with it. But that does seem to I mean, it is an interesting question. I mean, when you talk to sort of quants in the traditional equity space, you get the impressure. They spend a lot of time on data quality, cleaning the data, making sure that they have access to really high you know that the data is good.

So when we when thinking about poorting some of these ideas to the bond space, if you can't even agree on what historical bond pricing data is, it does seem harder to imagine that some of these strategies would be as effective. Yeah, and and you don't see I don't hear that much about those right in the market. So I wonder if that's part of the reason. I don't know.

I think that's one of the ultimate reasons why. You know, the conventional wisdom is that there is more more to do in the fixed income space for active management um then perhaps on the equity side, because there is so much structural inefficiency. And one thing we haven't talked about is the fact that you're literally talking about millions of bonds, and not only are there several million bonds out there at this moment, but a month from now, those bonds

will be different. And over the course of a year, you know that that inventory, if you will turn over because bonds are constantly maturing and their new bonds constantly coming out. The universe of US domestic stocks is reasonably static, and that statics probably not the right word, but the number is a manageable number most of the time. You know, we're talking about several thousand Once you get out into

the millions. You've got to do a lot to keep that data clean and too, and to even something as simple as getting a price as as you said, So it is a it is a big, big lift for a lot of firms and they spend a tremendous amount of money and time on it. Yeah, the barriers to entry are very high in the extent income. It's not like if you want to open, uh, you know, an equity account, um, you still have to do all the

kind of compliance and whatever stuff. But but other than that, you can just you know, do your research and a constructive portfolio with you can just walk off the street and then start a bunch of that that Really there is no room, there is no room for small players here. I mean the outlays of you know that you have to spend on on data and analytics are just just enormous, which kind of makes you wonder. It makes you wonder what is what the future of this of this whole

market is going to look like. M Magic. You touched on the idea of what the solutions could be too these bond pricing issues, And for as long as I've covered bonds, especially in the corporate space, there's been talk about doing more electronic bond trading, UM, maybe moving it to something that resembles an exchange and something that might

have more transparent pricing. But what are the prospects of that actually happening, because again, like I feel like the industry has been talking about it for years and years and years and it just never really seems to UM. I mean, there's been progress, but it certainly isn't anywhere near the level of something like stocks. Well. I mean one,

I'll let Eric pick it up later. But but one thing that you know, whatever platform you you can think of, will not address as the fact that you know, some of these guys just not trade a sign how the US sign a price to something that last traded three weeks ago. So that that was our finding. I think that's about half of mombs, half of corporate bombs well and through at least a three week period when they were not traded. Yeah, I think the issue is really

that it's always going to be a part of the market. UM. The there are a couple issues there. One is this issue a sort of critical mass, so you know, firms have definitely talked about and tried to take more of it. Electronic and that works better in places where there's going to be a lot of trading and a lot of supply and demand meeting. It's meeting halfway in the same spaces, right, And that's why there are some electronic trading platforms um

that do some of the work. You know there there are, There is a lot of electronic trading in the treasury market. There even is quite a bit in the higher, higher quality corporate market. But that that is that works best when you're dealing with the high volume, high deal size bonds. The further down the ladder you go, the more um fragmented it gets, the less trading there is. Then it's

a bigger lift to try and get everybody together. And the fact of the matter is is that for for anybody who's actively involved in the industry, whether that's the investment banks and dealers or even the large active managers, to some degree, there's an incentive too have some inefficiency in the trading, especially when it comes to the dealers, because they do make a lot more money on these structural inefficiencies in fixed income than they're able to in equities.

It's inevitable that when there is inefficiency that you can ring out with technology. Somebody will eventually get there and be able to do it. It will take more time, um, you know, because it requires that sort of critical mass. You have to be able to bring enough buyers and sellers together. Um. And when you don't have a single

point of exchange, that that's more difficult. But what we said earlier about the nature of the bond market, the fact that it is so fragmented and splintered, and there are you know, even even a single I mean, look at it this way. A single large company, a very very large mega cap company will still have one stock right, one share, common equity, maybe a couple of maybe they've got some prefers, what have you. But fundamentally, when you trade you know G E, you're trading G. They made.

The same company may have literally hundreds of bonds, and the differences among them may have Sometimes it may be as simple as just the maturity. But once you spread that out, you've got different coupons, different maturities, and very large companies with subsidiaries and so forth, may issue bonds at every different level, so the underlying credit qualities slightly different because they have legal differences in one of them

as well. Trying to standardize and commoditize those Um there there are certainly party of these parties that benefit from that, including the issuers themselves would But as long as you've got that much differentiation, you're always going to have a huge swath of the market that isn't going to trade quite that often. I do think that in some of it is a matter of time and some of it is a matter of sort of the socialization of the market,

people sort of getting on the same page. But no matter how far down the road you go in terms of making it electronic, UM, you're still gonna have inefficiency people trying. You know, the bottom line is traders still get on the phone and haggle over prices for bonds. That's always going to happen to some degree, the less

standardized and the smaller the bond is. So one other thing to add to to this, Uh, what we are hearing is that pricing agencies, pricing services now apparently look at at e t F prices because whoever is creating the E t F units, um, they are implicit like putting some price on these on these things, whether they have been traded or not. So that might be a potentially interesting having you to to get around that problem. Although it's it's clearly not perfect, but but it tells

you something. It's kind of crazy when the like liquid wrapper that you put around the stuff that doesn't trade very much becomes the reference point for pricing because it doesn't trade much. It's weird. Yeah, I think that that's definitely, definitely an important, interesting thing that's that the market is starting to absorb and learn about. I would point out though, that you're still dealing with a subset of the market.

Usually when you have a corporate bond e t F that has a hundred bonds in it, that will certainly affect the liquidity of those one bonds and bonds that are similar in nature to it UM, but you wind up getting concentration liquidity in those in that area as well,

So that kind of things. Certainly there's no question that that should have an effect of creating better efficiency in parts of the market where those et f s live UM, But to the degree that they have that bonds are not concentrated inside those et f s, you're still going to be dealing quite a bit with with this issue. Look that it's still an analogy, it's not doesn't fit entirely. But you know, when we talk about companies being a part of our not being a part of the SMP

five hundred, it makes a difference. If you're not in that s your the demand for your stock is not going to be the same. So it is kind of a somewhat paradoxical situation where you know, fixed income is supposed to be this safe and kind of boring asset, but we don't really to some extent now what these prices are, at least much less clearly than than we

do four equities. That to me that was a little paradoxical, and that sends fixed income is a little closer to like private equa to you or something of that nature. Not maybe to the same degree, but nature, I think

it's closer in terms of pricing. I love the idea that we think of bonds is really boring, as you said, but like below the surface, maybe you know someone an asset manager and a pricing service provider are having like this raging debate about how much the bond is actually worth, But we don't get to see that most of the time. You know, Marchick mentioned earlier about the fact that such a huge proportion of municipal bonds that we observed were only being held in the funds of a single firm each.

That's that's what's particularly interesting when you said about below the surface. You know, that's where that kind of argument may really come in when a manager may be the only large investor holding that bond, and that that means that the pricing service itself isn't necessarily seeing in anybody else's port olio either. Um, They're gonna sign a price based on some formula, some matrix or or artificial intelligence.

And that's a case where the manager may know something about the you know, it's if it's a few million dollar bond of a small, you know, nursing home in West Texas, that's where that argument may come. But it's as you said, it's all it's all under the surface, and we'll never see anything about that. So there was more though bonds all right, Well, Um, Matcha and Eric. That was that was really interesting, um, and really good fun to dive beneath the surface of an otherwise boring

fixed income market. So thank you so much for coming on. Really appreciate it. Thank you, it's our pleasure. Thanks. That was great, So Joe, I actually feel kind of bad for calling the fixed income market boring because I don't think it is. But I do think that there is this big portion of it in terms of the market structure that doesn't get as much attention as it should in my mind, and the pricing of a lot of bonds is one of them. No, I think it's super

one of those things. Interesting. My big takeaway is that I feel like if I were going to start some sort of like asset manager, or if I were going to get into trading or something like that, I feel like I would definitely go into the bond space, just because you know, listening to that after all, you know, it still feels like it's come up in some of

our conversations. There are so many I guess inefficiencies or sources of friction might be a better way to characterize it in the space, whereas with equities there are very few, And as such, I suspect that there are you know, risk premium out there yet still to be harvested by the enterprising bond manager the more they understand this stuff. I was worried for a second when when you talked about starting something that you were going to start like

the team the electronic bond trading platform. Um, but no, in a different direction. Okay, I take advantage, take advantage of all all the fragmented bond trading platforms to find inefficiencies. Yes, Um. The other thing, I mean, there's a lot to unpack in that discussion. Um. The description of the treasury pricing discrepancies is still really remarkable to me, um, and I

would love to hear more about that. But the other thing that stuck out was this idea of e t s kind of becoming um the reference price for the bonds they're actually wrapped around. UM. And I've heard that before from people in the market, and I can understand why, but it just seems so circular to me and sort of like intuitively odd when when that came up, like I literally got in my head that image of the snake eating its tail. So say it's exactly like It's like, okay,

so it doesn't sound right. It sounds problematic, Like I don't know how it would become a problem, but it doesn't sound great if the instrument designed to hold the bonds can't be priced easily because the bonds are a liquid and so you end up pricing the bonds based on where the et F trade. It does not sound great, but maybe it's fine. I don't know. We'll have to wait to a crisis and then will say, oh, yes,

that was a big deal. Well, I mean, to some extent, we we kind of had, um the credit crisis in and the e t f s performed reasonably well. But you could imagine a scenario where um, because the e t f s are sort of influencing the underlying and vice versa, maybe you get a cascade effect of some sort. But anyway, um, your your image of the snake eating its own tail is it's gonna stick with me. Okay, should we leave it there? Let's leave it there? All right?

This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe wi Isn't though. You could follow me on Twitter at the Stalwart. Follow our producer Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast Francesca Levi at Francesca Today, and check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening,