Why Treasury Market Spasms That Shouldn't Happen Keep Happening

question a bit differently. Do you ever think about what a treasury actually is? Yeah? I mean I don't have a strong like intuitions about it, but I kind of feel that, Yeah I do, But you know, I'm always up for learning more. Yeah. Um, well, that's what we're going to 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 U S 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. Yeah, I mean, so you ask, like, what

what is a treasure? And how I think about it? And at some level I really do think it's almost like it's like the fundamental building block of the entire global financial system is the deepest market. It is the most liquid market. It has no credit risk, um, you know for the most part, and so the price there's

like a purity to the price. But as as liquid as it is, everyone's in a law all 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 of her good happened if the treasury market is breaking. Yeah, that's right. So we've had these big moments of disruption in the treasury market. Recently, we had, um, well, the big one was the March mayhem in the market when a bunch

of lever trades blew up. But most recently we had the yield spike in February, and you know, way before that, we had the repo madness in September I think it was twenty nineteen, and then we had the the flash crash in US treasuries back in although maybe something around

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

one trillion dollar mystery. Yes, all right, well we have the that's the size of the U. S Treasury market. By the way, we have the perfect person to discuss all of this. Our guest for this episode is Yeesha yead If. 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. Tracy and Joe, thank you so very much for having me such a pleasure to be here, UM, and particularly to

get to talk to you about US Asian markets. What can be more exciting than that? Nothing? I agree, alright, So maybe just to begin with, I mean, I just listed some recent um, let's say, conniptions in the U. S. Treasury market. It feels to me like these are happening more often. But you know, I haven't gone back and looked throughout all of the market's history, Is that right? Like, do you think this sort of random bouts of volatility is happening more often? It certainly feels that way, Tracy,

it really does. UM. I think one of the things that has been happening in the U. S. Treasury market, UM, is that this market structure has changed really profoundly over the last decade or so. UM. So this used to be known. I think UM across the market is being a really super boring space. This was really the market in which UM the trading would happen over the counter by telephone, using screens, requests for quotes and so on

and so forth. It was slow UM. It was just very steady market where nothing would be seem like it could go wrong. And it was essentially dominated by the primary dealers UM that were the keen to mejories in the space, both in the primary as well as in

the secondary market. UM. And what we've seen over the last decade or so, and you and your colleagues at Bloomberg have reported extensively on this UM, it's really this change in market structure that has affected how this market is working UM, that has affected UM, the risks that are impacting this market, as well as also the quality of the liquidity provision that is coming into this market and how resilient this liquidity provision is UM. And that

change really has been UM. This emergence as it has been across the entire UH marketplace pretty much the emergence of high frequency trading in the inter dealer space in the secondary market, which has really become the dominant form of liquidity vision UM. And what has happened here obviously means that primary dealers in hf T traders now are

competing a lot more fiercely. There's a great deal more technology that is coming to bear in the U S treasury market is no longer the sleepy space full of telephones. This is a marketplace that is in motion all the time. And as a result of that, we have new risks, we have a new dynamics that are impacting the space.

But the essential point here is that none of this is really that new, because it's been happening in the equities and gervities markets for a whole hell of a long time, similar um disappearances of liquidity, flash crashes, many

flash crashes, and so on and so forth. But now these are happening in the US treasury markets exactly as we would expect because we've seen it in equity in gervitives, but unfortunately in the US treasuries we just haven't been focusing on it, and so it's really taken us by surprise. And so really it feels like this is happening more often. So I want to get in, you know, we want to get into obviously, like what this new structure looks like and why it's not as a resilient or robust

as the old sleepier structure. But before we do that, what do we just zoom out for a second, and what don't you tell us about your work and the sort of you know, trade to mention you're at the law school. What is the lens with which you come to this problem from? And uh seek to sort of understand problems and solutions. You know, thanks to that question, Joe, because you know I wonder that myself sometimes, because you

know this is this is I'm a law professor. I remember, really boring law professor A strudy market structure and the regulation of market structure. And for the longest time folks have been very pollyanish about us treasure market structure, in other words, that it will always work. M This will be the most resilient, most robust market structure anywhere in the world. As you said, Tracy, that and Joe that this is the deepest most quid market in the world.

That is a standard spiel that we see every single time we have a report from the regulators. This is the deepest, most liquid market in the world. And so you might wonder why it is A law professor really would want to look at this because what we do is look for problems, right, That's our job. The U S Truasure market structure. When I started studying it, you know, I was bowled over. Um. I was coming at it from the regulatory stide. I wanted to understand how this

market is regulated. I wanted to see if that regulation is fit for the job that is doing today, which is regulating this extremely important as well as technologically advancing market. And what I discovered there was a complete shock. The paradigm by which this market is regulated is like none other, UM in our space. The regulatory structure I think deserves a conversation because it is really feels like it does not work. Um, it is just not set to work.

This regulatory structure, the public structure as well as the private structure, in some sense just leaves in nor miss gaps. And the reason for those gaps possibly stems from the belief that this market will be perfect and will always

perform and it's completely risk free. And so regulators, I feel, have really taken their eye off the ball, and that structure that we have in place today really just does not exist to function to regulate a marketplace and to match the marketplace that we have today, um, and so it should not be surprising that we're seeing some of these connections, Stracy said, happening with ever greater regularity because some of the guard rails that have been put in

place in other markets just don't exist in treasuries, right, and so it should not be surprising to us that this is happening. You know. One of the things that that you guys mentioned was in relation to the flash crash and the flash rally in two thousand and fourteen, and that's really set off this kind of regulatory circumspection, UM,

this reflection on US treasury markets. And I think that's when regulators discovered that this market actually has a whole bunch of risks that they never knew exist that and that they had to come to this space with a greater degree of deliberation and intention that they have done historically. But it also showed that the regulatory structure that we have today is really not set to do the job

that we expected to. And the reason for that is that this market structure for regulating the public structure for regulating US treasury markets is extremely fragmented, Unlike every other market, like equities, observatives. This market does not have a lead regulator. There is no one person that is policing this market. We have a fragmented, loose association of four or five superstar regulators, the big top regulators for the marketplace, but

none of them has elite status. Right So the US, the US Treasury, Um, the New York FED, they are responsible in the auction space. We have the sec UM and FINRA that are taking care of the securities market firms that trade in this space. We have the FED to reserve the fat in the o c C that look after the bands that are the main dealers in this space. And so everyone is sharing a little bit of the authority. And that can be great because they

bring their expertise and their insights into the space. But equally it means that no one person always has incentive to come forward and take a lead and set an agenda and coordinate information costs. You have to share information, you have to develop a plan for enforcement and reform. And so we should not be surprised that rulemaking that is taken for granted in other markets just does not

happen in US treasuries. It just hasn't happened in US treasuries, And perhaps the starkest example of that is the lack of information in this market. Right. So up until two thousand and seventeen, and you guys are you know you report on markets? You know this stuff? You are you know you are steeped in this stuff. It's shocking, I think for all of us to do this. It discovered it.

Up until two thousand and seventeen, there was no mandatory secondary reporting regime portrayed in US treasuries, right, And that is kind of shocking. And what that means is that regulators have not had information to figure out what exactly is happening in secondary market activity on a granular basis.

And it's you know, comes as no surprise that it took a year to figure out what the flash rally was about, and even then into the two thousand and fourteen flash rally, and even then they did not have a conclusion. We still don't fully know what caused marsh twenty, the blowout that you were mentioning, the march madness, Tracy Um. And the reason for so much of that is that this market does not have comprehensive data, It does not have granular reporting even today, Um sorry, can I jump

in there, because this is something I wanted to ask you. So, given the lack of transparency in the US treasury market, you know, even though it's the sort of bedrock of the financial system, we don't quite know what's going on with it at all times, how do we actually measure treasury market liquidity? Like, what do you look at in your research? I'm curious because everyone has different definitions of ease of trading? So what are you watching and how

has it sort of evolved over time? Yeah, I mean that's a that's a terrific question. It's a twenty one trillion dollar question. In fact, it's a six billion dollar question a daily basis, because that's that's the liquidity that is coursing through the treasury secondary market in a daily basis, compared to around five hundred billion in the equity space. Right, So this is supposedly a market in which we have

six hundred billion odd I think that was March one. Rather, you know, we have twenty six hundred billion dollars worth of liquidity. Course in this market every day liquidity is hard to measure. But the idea here is that you should be able to trade without causing price impacts. Right, particularly in this market, you should be able to make large trades without there are being a price impact in the market structure. That is exactly what we're not seeing.

So in the context of the blowout in February, for example, we saw that the five year and the seven year UH tenor just incredible amounts of movement in the spreads in just a very short period of time, and that was due to liquidity concerns. In the case of March, we saw enormous prices locations that were happening because liquidity in this market disappeared. And what that means is that that the price changes are not happening because of fundamental

informational changes. Right. So of course we expect volatility takes that's in the marketplace because information will affect how price changes happen. But in the treasury market, we should not expect these price changes to happen because the market is becoming a liquid because dealers are not there to supply trading opportunities constantly throughout the trading day. Liquidity in this market should be taken for granted, so that the price

changes that are happening are big. Is even informational and fundamental issues rather than because of liquidity issues, because they're not enough trading opportunities for buyers to have sellers and sellers to have buyers. So really, that's how I understand it that we are that we are relying on a marketplace that is supposed to be responding to information, not a marketplace that should be responding to disappearances of trading opportunity.

So talk us through because in theory, you know, you describe the old sleepy treasury market of the dealer community and a lot of it being done by phone, and now we have this sort of like I guess richer treasury ecosystem and shifts and hedge funds and inter dealer trading and all that stuff in theory and think, okay, more participants, different preferences that would make it more liquid.

So what is the failure between theory and practice such that even though there is this sort of you know, a whole like flora and fauna of treasury participants, it doesn't translate automatically to uh, greater liquidity. And we do seem to see this rise of dislocations, like what are

the leading theories for why? Basically, yeah, that's an awesome question, Joe, and you know, I think it's one that perplexes regulators and perplexes market participants because exactly as you said, you look at the market and you know there are there's three hundred billion dollars worth of daily trading in the inter dealer space, which is the super liquid space with dealers are trading with each other, and on a normal day, that liquidity seems so incredible, it seems so lush and

robust because we do have the primary dealers ELM, we do have these brand new high frequency traders that are expansively providing liquidity throughout the trading day. Now, the HFT participation in the US inter dealer spaces around is around sort of sixty five, And of course what that means is that we expect them to be available and they are generally to be providing liquidity robustly throughout the trading day. But what we have is a problem that liquidity can

disappear just when we need it the most. In other words, that the market participants here, the automated trader and HFT traders as well as the primary dealers, have no incentive to remain on the market when conditions get stressed. Rather, these folks now are competing with one another. Right. Whereas primary dealers dominated for much of the treasury market history, right recent history. Now the competition with primary dealers in the inter dealer space means that they've been pushed out.

Their margins are smaller, they're no longer the biggest players, who don't have as much skin in the game in this marketplace that they traditionally have done. And HFC experts, uh, you know, these traders tend to operate which much leaner operations. Their balance sheets are smaller. Um they are there. They are they are more nimble, they are securities forms. They don't tend to be the banks, right, and so there is no incentive for folks to remain because age super

costly to be there. They're competing with each other, and when conditions get stressed, the algorithms may not perform as perfectly as they normally should, and so in those situations it makes more sense to exit or reduce your participation, or to reduce the market depth that which you participate, or to reposition yourself um to the back of the queue rather than necessarily be there to forth rightly provide liquidity. And that's what we've seen time and time again in

these episodes. In March, for example, we saw we saw HFT traders rather pull back quite drastically, very sharply in the context of that that March episode. In this most recent episode in February, it was just a general pullback. Right. In this case, the primary dealers to the auction went horribly. As you know, one of your colleagues, List McCormick has written about so wonderfully recently, right that the auction went horribly and there was just a general pullback and liquidity

at that at that at that moment. And so the liquidity looks great on its surface on a normal day, it looks beautiful and wonderful. But when it's time for the rubbert to hit the road and when it's time for stress, I think that's when we have the greatest fear that it might disappear, causing these liquidity bouts to

happen and causing for prices to dislocate. And I think what's really, really, really kind of horrifying for me as a as a as a as a person that studies this market, and for all of us really that need this market is that the treasury market is supposed to perform exactly during periods of stress, right, it says the market that's a little bit countercyclical. In other words, that when everything is going cluster is in the normal market.

This is the market that's supposed to stand up and to be there and to be resilient and to provide liquidity so that when we all rush in there in our flight to safety, we're going to have the trading

opportunities we need either to buy or sell. Mhm. So, just on that note, can you talk a little bit more about the role of the primary dealers here, because in theory, they're supposed to be, you know, the big market maker um in the treasury market, and there's a suggestion that because of various post crisis rules and trends,

they've sort of retreated from the market. And then, I guess my second question is based on what you just said about h f T s retreating from the market at precisely the moment where you would want to have them there to provide liquidity. Is the answer that you somehow force primary dealers and other market makers to intermediate,

and how would you actually go about doing that? Yeah, I'm so glad you asked that, Tracy, I mean on on the on the first part, the role of the primary dealers here is super interesting because as you said, they've been involved throughout these folks have been they have relied upon in the auction space, as we know, they have traditionally been relied on in the secondary market, and

they do dominate in the dealers to decline space. So there is one space, which is where the clients interact with the treasury market when we are able to go, when we have the big institutions and they're able to go and buy and sell treasuries, the mutual funds, the hedge funds, the foreign governments and others that are able to obtain treasuries through the dealer to client market, and

that is still dominated by the primary dealers. And again that's the market with around three hundred billion dollars worth of daily turnovers. So it is a it is a solid component that we rely on for primary dealers to take care of, which is this dealers decline space, which is still very much in ot see space and bilateral

space in which primary dealers are the key players. Now their retreat as it were, competitively is really happened in the intero dealers space, and so you know, one question to ask is what's their skin in the game in the market at present, And it's an interesting question because they are facing balance sheet pressures. You guys had a triffic podcast a couple of weeks ago with Saltan pots Are on the SLR issue and other issues um that discuss the balance sheet pressures on primary dealers in the

treasury market. And certainly there has been a lot of commentary here that the post crisis reforms following Dodd Frank have put pressure on primary dealer balance sheets. And the other thing to appreciate here is that primate dealers are also extremely active in the repo market right and they're extremely active in the much larger repo market where US treasuries are now post crisis, the preferred form of collateral.

So these folks, you're facing tremendous pressures on a daily basis to maintain the function of the treasury market where trillions of dollars of treasuries the essentially locked up as collateral, as well as to have treasuries and cash available to intermediate in the dealer's decline, as well as in the inter dealer space as well as obviously in the auction space to the extent they need cash to purchase on a regular basis, So there are tremendous balance sheet pressures there.

And as you discussed in the episode a couple of weeks ago, you do have the SLR issue that is now we have an answer to that, but you also have other regulations like that gesup charge. That means that there is a constant balancing that is happening here, which can be a little scary sometimes during crisis periods because you don't know if primary dealers have the balance sheet space to come in there and provide liquidity, to come

in there and provide cash if they need to. And that is something that we need to worry about when it comes to understanding the liquidity of this market under stress. And so one thing you asked the second part of your question, Tracy, which I think is a really brilliant question on that policy side, which is what do we do do we have what are afformative market making obligations attaching to both HF the key h F T players as well as the primary dealers, And I think that's

a that should be an idea on the table. In other words, do we go back to the idea that was prevalent in the equity market, for example, UM in the eighties and nineties, that you have these afformative market makers that always provide liquidity, that trade against the wind if they have to, UM, that promised to stay on the market, to trade even during times of stress. Do we do that today in the treasury market because it's more important and I think it's a good idea to

have on the table. The interesting question here is how it links back to your first question, which is this balance sheet space for primary dealers UM as well as HFT folks who are who do have these thinner, smaller balance sheets. In general, do these institutions today have the elasticity in their balance sheets to be able to perform in the event of a crisis and the event that they are subject to informative market making because that is

expensive us as you can imagine. Let me let me jump in there, because this brings to mind a question I've been thinking about. So you've talked about the sort of the fragmentation of regulation in this space. There isn't a single clear regulator, but something I've been thinking about and the sort of the tensions that led up to the SLR decision. It was sort of around this is this sort of like intersection between post GFC regulatory decisions

versus macro policy. So you have these determinations, it's like, Okay, banks have to hold a certain amount of liquid assets and have a certain amount of capital and so forth. On the other hand, you have the FED making um non regulatory macro decisions that even time about the size of its balance sheet asset purchases, UH for you know,

for broader hitting its dual policy goals. How much is the tension uh emerged from the fact that these regulatory decisions that were made about bank balance sheets didn't necessarily anticipate a decade of very expanded FED balance sheet, multiple rounds of asset purchases, very heavy treasury issuance on a historical scale. And it's sort of essentially this sort of

like collision course between two different priorities. It's a great question, and unfortunately I'm gonna you know, I'm gonna do it my law sheets do which is take a pass on this one, because you know it's not you know, it's it's it's such a tough one because I think you know what I what I think has been happening here and which your question really speaks to, is that we don't have the regulatory picture as fully as we do want it to be there, right, so we're making decisions

without necessarily seeing the full parts of the elephant. And so obviously we come in after the two thou and ten crisis clearly wanting to make bank balance sheets as robust as possible. Right, of course we want to do that. Of course we need to do that. And then of course we also want to make sure the repo market is as secure as possible. So we you know, so we we try and make this market is dependent on treasuries as possible with respect of the collateralization of this market.

And guess what, that's exactly what's happened, right, So sixty seven percent or sixty eight percent of the market in the Bilagal report market is now collateralized by treasurey. It's even higher in the reverse report market around So of course, you know, we've done a good job there to make

these markets SA. On the other hand, we still require on the we still require the nuts and boats of intermediation to be provided, and so we need the primary dealers to have the elasticity in their balance sheets to be able to do that. And then on the other side, we have this incredibly dynamic macro picture in which, as you said, QUEI FED purchases. Um, we just have this really interesting global picture also emerging with respect to the role of the US and the role of Treasury and

the role of the dollar that is happening. We have so many factors to consider here, but what is missing is a regulatory structure that can do that job. The FED, the Treasury, the CFTC and others are all fragmented. In the treasury space, The f STOCK, the Financial Stability Oversight Council created in the wake of Dot Frank that could coordinate doesn't coordinate in this space. So we're not having the conversation that you want us to have, Joe, which

is being able to try and put these pictures together. Um. And so you know, for that reason, I feel like I have to take a past because there is no real coherence to the approach that we have such that trying to find a trying to find a a narrative

that can explain the interactions is really difficult. You mentioned the REPO market there, And um, I wanted to get your thoughts on repo market reform because it feels like this was on the radar immediately after the financial crisis because so much of you know, the two thousand eight housing bubble sort of emanated from trouble in the repo market. A lot of trades were collateralized with you know, sub prime structured finance A B S and stuff like that,

and then it all went awry. But it also feels like the repo market hasn't changed all that much, like the the nature of the collateral has changed, but the actual functioning, if anything, seems to have become more concentrated on one or two key players. Um, what are your thoughts there and how does the report market fit into your overall research on treasuries? Great, So, the report market

is mammoth. It's extremely important, and it's a market in which the daily consumption of treasuries in cash changes incredibly differently on a on on a daily basis, Right, So the needs of this market on a daily basis diverge sharply from one week to the next, as we saw in the case of the September as An incident September two incident. The report market is liable still to sudden

disappearances in its liquidity and its functioning. UM. I have a trific colleague at Vanderbout Morgan Rix who has written about a report market reform from the structural perspective to try and shore up some of the cash like aspects of this market. But as you said, right, the attention on the report market and on report market reform has

really has really disappeared, right. UM, we have not been focusing on what we should do to make this market secure to deal with the fact that it's still fragile. Um that it does change in a week by week basis that the consumption of treasuries in cash does change. One of the proposals that's been on the table for both the secondary market as well as for the report market is in relation to central clearing, right, which is trying to bring in a greater degree of clearing into

the space. We do have some we have the tri party report market that does have some clearing arrangements, and whether or not we should think about making clearing more systematically a part of this as well as the secondary market in treasury. So that is one idea that has been on the table. But again, as you say, you know, the question is this market has become enormous. It is a market in which we are intermediating around six trillion dollars worth every single day to meet the daily financial

needs or financial farms across the system. So trying to get this into a clearinghouse even is something that does feel slightly intimidating and haunting and scary um and possibly something that we could talk about in this conversation. But it does feel like it's become a problem from the structural standpoint that maybe has become a little too big

to address at this point. So it feels like we're going on like we've done before and really using the fact of treasuries as being the performed form of collateral to provide the safety that we need in this market. In otherwise, in other words, we're looking to collateralization as the means of securing this market rather than structural reform as my colleagues have talked about, or you know, moving into central clearing as a way to try and protect

this market against us. Can you just you mentioned that central clearing and can you sort of just spell out the basic idea of what that would theoretically look like in the treasury market and what the I don't know,

drawbacks of that would be. Yeah, I'm so glad you asked that, Joe, because you know, clearing, clearing is clearing is this amazing thing that we have in our securities markets, right, clearing houses are as I'm sure I thought of your listeners know, this is the fundamental structure in our market that protects all of us and that we hardly ever get to see. And that's a good thing. So essentially, you know, central clearing houses, they are the guardians of

the market. They protect us against counterparty risk failure that the counterparty trading what will not provide the securities of the cash that you need. And in return, what clearing houses do is that they have a whole bunch of things that they put in place to keep the keep themselves and the market safe. In other words, they make sure that the folks participating in the market provide collateral margin, that they have procedures in place to share losses between

their members. Um, but the clearing house is well resourced in case even their their members don't have the resources that they need. So this is the structures that's design that's designed to absorb and buffer risk, and for the

most part it works really well. But as you might expect, this is a structure that's also just incredibly too big to fail, and it's one that has grown in its footprint following Dot Frank as we rely on clearing houses much more systematically to protect the gervatives and swaps market.

So the idea here has been and Darryl Daffie and others have have have thought about to try and bring central clearing into the U S. Treasuries market, and I think it's a it's a terrific idea, but I think if we take a step back, it's worth while noting that clearing does actually exist in the U S. Treasury markets. Unfortunately, the clearing in this market, as it does exist, is a hot mess. So we do have central clearing in a in the U S. Treasury market, but it's a

completely hodge podge and confusing system. Central clearing does exist when you have say two dealers to primary dealers for example, that trade with one another, but it does not exist or you will not get central clearing when you have saying eight two hift s trading with one another. So this is a patchwork of clearing that exists in the U. S. Treasury market, and unfortunately that's a disaster Joe. That is like the worst off the two worlds that we could

possibly imagine. In other words, we have a clearinghouse that exists that partially clears US treasuries. I think there was a terrific treasure market Treasury Practice Markets Group report UM in two thousand and eighteen, I think that dealt with clearing in the U. S. Treasury markets, and what it described was that approximately seventy five of the thing the inter dealer market is not essentially cleared, but t is.

And so you can imagine the risks of that that the clearing house does not have a full picture of what the risks in this market are. That market participants who are members of the clearinghouse don't have a full picture of what is happening in this market will kind of risk the clearinghouse faces and you don't get the benefits of central clearing for the market as a whole um. You don't have set off a netting across all these secondary market treasury transactions that could reduce the risk of

the clearing house and individual members space. So this is a really confusing and just an unacceptable picture for central clearing in US treasuries in the secondary market space at present. So you know, the question is whether or not we bring central clearing in here, and I think it's a solution that needs to be on the table because obviously

it's one that has worked in other markets. But to do this, we need to be extremely careful because we are going to be setting up the clearing houses to end all clearing houses right for US treasury market function.

And again, given the counter cyclical aspect of treasury markets, that is that they have to work when every other market is collapsing, that we really need to make sure that this clearing house, over and above every single other financial institution in the whole wide galaxy world whatever, is

the one that is safe enough to protect us. So I get the sense from this discussion that a lot of the problems that are happening in the treasury market um and the weaknesses that you described, like a lot of those are the results of similar forces to what we've seen in other asset classes. So stocks has gone through,

you know, its own a bout of electronification. People have had the same discussions about whether or not high frequency traders actually provide liquidity in stocks and moments of stress. But and and to some extent, you know, corporate bonds are sort of going through this as well. But I guess my question is, like, is the problem that the treasury market is encountering these issues that aren't necessarily specific to treasures? But the difficulty is that regulatory fragmentation that

you describe before. Is that a fair way of thinking about it, Like, this is not necessarily a treasury market specific problem, but the thing that makes it bad is the fact that no one's responsible for it, and no one's looking at it in a holistic way. Exactly. I feel like you just wrote a law of your article, Tracy. I think that was that was that was the perfect that was the perfect summary there. That's exactly what you know.

That at least to me, that seems to be the problem that we have exactly as you said, seeing these phenomena before in other markets. Post two thousand and ten with the flash crash, regulators went through an incredible degree of investigation and research, and the SEC and the CFTC did such a great job in collating a whole amount of research and doing the analysis, doing a bunch of rulemaking, so we saw systems compliance and integrity, for example, the

SEC rule, direct market access. All of these different rules come into place did trying to shore up the resiliency of a highly automated, super fast market structure. And for the most part, these reforms have done a great job in making this market more resilient, more robust. I think, you know, we've gone through periods of volatility, We've gone through periods of extreme stress, and that market structure has

held up. Unfortunately, US Treasury market, even these very very basic reforms just to safeguard the resiliency of the trading infrastructure just haven't happened, right, They just haven't taken place. And the X factor that I that I that I put some of this blame at is this super fragmented regulator model that we have in the U S Treasury market.

It's unsurprising that regulatory updating in this market is so thin because we have to get a lot of regulators, big busy regulators in the same room to talk about these issues, to share information, to come up with the plan to coordinate. There are a whole bunch of costs that just don't exist for the regulators that are primary

regulators and other markets. They can act essentially with enormous amounts of power, control and deference given to their actions in the equity space with the SEC, or in the gersy space with the CFTC in the treasury markets. However, they have to come together to coordinate, and there are barriers here to their coordination. So, for example, there have

been difficulties between regulators and sharing information. There are institutional constraints that they have in providing fulsom information to each other. In addition, we're dealing with regulators that have very different approaches at times. Right, So the FAT in the New York FED and the o c C. These are prudential regulators. They are designed to safeguard the safety and soundness of

the financial system in general. That doesn't mean that that that means that they don't love the idea of a whole bunch of disclosure in the market to tell everyone what the skeletons in this market might be, as it might create some conditions for a systemic run for a problem to happen in that market space. On the other hand, we have the cft you see in Finnver that are

that are the securities markets. Regulators, they are much more into creating these super liquid markets just disclosure and transparency in these other factors. So we have differences in approach, we have differences in agency mandates. We have the need for all of these institutions to come together to develop a plan. And it should not be any surprise whatsoever that we just haven't seen the kind of rulemaking that

we have in other markets. So I'm not saying that we have, you know, a huge amount of regulation here that that's not That's not what I'm saying. What I'm saying is that we at least need to have a regulatory structure in place that is geared towards providing even the most basic reforms that how are tried and tested in other markets, that work in other markets, but that are sadly missing in US treasuries, and that leave this

market therefore very vulnerable the systematic fragility. Yes, thank you so much for coming on. That was Thank you guys so much for having me. I just completely I wish you could have seen me in my little room. My arms are boiling everywhere. I was going crazy. You know, you have such great questions, and you know I could talk to you guys for like another hour like this is you know, this is so cool. We'll definitely have to do it again. Yeah, I would love it. And

thank you guys so much. I mean, it was so cool. Your questions were just brilliant. You're writing. Some of the reporting that you guys do has been so important to the writing I've done. I could not have got the information and insights I did without that. Um and honestly, I just have so much fun. I just thank you

so much. That's great. Thank you so Joe. I thought that was really fascinating conversation and such an important one because, as you laid out at the very beginning, this is an ultra significant market for well, for the entire market, and it's sort of the thing on which everything else rests. It's the you know, the benchmark risk free rate, and and there is this assumption, I mean you should touched

on it. There is an assumption that in times of trouble, you should be able to liquidate a risk position and trade it for something considered safe, which you know would usually be a U. S. Treasury bond. And if the market can't serve that function, it seems like that's a bit of a problem. Yeah. Absolutely, Like this idea that's like, okay, like in times, you know, normal times, treasury trading is fine, and higher volatility times actually you know, victorizes treasury trading

is still probably fine. But then this idea that's like you hit some new threshold with the volatility in last March was the clear example, get so high that this sort of like safety veilve market that exists out there, even it starts to break, then it becomes a real problem and can't sort of perform the I guess countercyclical function the hope it would. Of course we had to.

We saw the FED step in last year. It definitely seems like if they're that level, whenever it is, we don't hit it that often, but we seem to hit it enough that it's, uh, you know that it's an

issue that needs addressing. Yeah. Absolutely, And it is kind of frightening that, as we discussed, we still don't know exactly why these volatility issues keep propping up or you know, why we are getting these moments of drama in the market, and that's kind of I mean, that's a little bit frightening because it is this twenty one trillion dollar market um that kind of touches on everything else. It seems weird that people aren't um more dedicated to tracking it

and sort of figuring out what's going on. But I guess that speaks to the regulatory fragmentation that Yesha was describing. It still seems like they're is more that, like, I don't know, maybe the FED could do to treat treasuries as a true risk free asset. And I know we talked about this a little bit in our discussion with Josh Younger, but obviously reserves are sort of like the ultimate ultimate risk free asset because they're all fungible, they're

all identical, and treasuries are close. But because they have different liquidity h questions and different maturities and stuff, they're not quite the same. But it still feels like perhaps there could be more done, such that like a standing reverse repo facility something such that at any time someone can be guaranteed by the government to get a liquid cash for their treasuries. It seems like that could be

part of the answer. But that's just that's just my that's just to take no, no, no. I think you're right, and I think it does feel like the FED is taking more of an interest or UM I guess, a more proactive approach to the treasury market overall. Like it.

So I've said before that like I think the treasury like smooth functioning of the treasury market is now a sort of unspoken UM priority, if not target for the FED UM And I think that's right, and I think they're going to be looking at it more and more as these issues crop up. Yeah, no, and it should be.

I mean, look at you know, the the the entire Yode curve as I see it, should be understood as a policy instrument, and you have like the shortest lowest duration assets are reserves and the longest duration like way out on the curve. But it always an expression of policy.

And I think this gets to the question that I asked about, like this sort of intersection between macro policy and regulatory policy, because you know, it's all right, we're running large deficits, because we're running countercyclical fiscal policy right now, we're running a large balance sheet policy on the part of the FED. So at some level, the regulative the regulatory regime has to acknowledge that the fiscal and monetary regime needs to use these tools from time to time

and sort of recognize that. But again, I guess that guests to the answer of like, well, who is the individual regulator that's going to make that call? And we still don't have that? Yeah, all right, Um, shall we leave it there? Yeah? Leave it there? Alright. This has been another episode of the All Thoughts Podcast. I'm Tracy Halloway. You can follow me on Twitter at Tracy Halloway and I'm Joe Wisn't though. You can follow me on Twitter

at the Stalwart. Follow our producer Laura Carlson. She's at Laura M. Carlson. Followed the Bloomberg head of podcast francesco Lead at Francesca Today, and check out all of our podcasts at Bloomberg under the handle A Podcast. Thanks for listening to A