Odd Lots Podcast Summary: "What We Learned About Treasuries on the Night of April 8"
Introduction and Context
In the episode titled "What We Learned About Treasuries on the Night of April 8," hosts Joe Weisenthal and Tracy Alloway delve into the tumultuous events that transpired in the U.S. Treasury market during April 2025. Released on April 28, 2025, the discussion centers around the unexpected volatility in what is typically considered a "boring" market—the U.S. bond market. The episode features Ira Jersey, Bloomberg Intelligence’s Chief Global Interest Rate Strategist, providing expert insights into the causes and implications of the dramatic movements observed during that period.
The Unprecedented Volatility in the Treasury Market
Tracy Alloway opens the conversation by highlighting the unusual activity in the bond market post-Trump's Liberation Day on April 2nd. She remarks, “This was one of the biggest, most dramatic things that happened in a market that really, as I like to say, is supposed to be pretty boring” (01:26). The discussion quickly narrows down to the events of April 8th and 9th, when Treasury yields spiked unexpectedly, causing widespread concern among investors and analysts alike.
Joe Weisenthal shares his personal experience from that night, stating, “I got zero sleep because I was just refreshing my Bloomberg app... watching this yield spike” (02:31). This anecdote underscores the intensity and anxiety surrounding the sudden market movements.
Analyzing the Basis Trade and Swap Spreads
The hosts and their guest, Ira Jersey, explore the initial theories surrounding the volatility, particularly focusing on the basis trade. Tracy notes, “People reached for the old bond market boogeyman in the form of the basis trade” (03:11). However, Ira contests this notion by explaining that data did not support the basis trade as the primary cause. He states, “If it was the basis trade, we didn’t see it in the data almost immediately because we would have seen things like a reduction in open interest of treasury futures” (09:09).
Instead, Ira points to the swap spread unwinding as a more significant factor. He clarifies, “It was really the swap spread portion of that trade unwinding... the swap market was moving around 10 basis points” (09:09). This shift indicates that the volatility was more related to leveraged positions in the over-the-counter swap market rather than the basis trades in the futures market.
The Role of Regulatory Changes and Structural Market Shifts
Ira Jersey elaborates on the underlying reasons for the negative swap spreads, attributing them to regulatory changes post-Trump’s election. He explains, “After President Trump won, the expectation was that the enhanced supplementary leverage ratio would be removed...banks couldn’t own enough Treasuries...led to negative swap spreads” (11:45). These regulatory constraints, coupled with insurance company regulations requiring diversified portfolios, created significant duration gaps in financial institutions' balance sheets. This structural imbalance made the market more susceptible to volatility when leveraged positions were unwound.
Impact of Structural Changes on Market Liquidity
The conversation shifts to the broader implications of these structural changes on market liquidity. Ira notes, “Moves in the treasury market show the fragility of liquidity...structural changes mean we continue to see bouts of volatility” (07:10). He emphasizes that the reduction in balance sheet elasticity due to Basel III regulations has constrained dealers’ ability to absorb shocks, leading to heightened volatility during periods of uncertainty.
Real Money Investors and Their Influence
Tracy raises a critical point regarding real money investors, questioning their behavior during the volatility. She probes whether institutions like pension funds and insurance companies are shifting away from U.S. Treasuries due to policy uncertainty. Ira responds by differentiating between types of real money investors, noting that central banks tend to hold short-term securities and are less likely to engage in long-term selling. Instead, the selling pressure primarily came from private investors such as pension funds and insurance companies seeking better yields or adjusting their portfolios in response to economic forecasts (21:07).
Term Premium Debate
A significant portion of the episode is dedicated to debating the concept of the term premium. Joe introduces the topic by questioning its practical utility, and Ira provides a nuanced perspective. He asserts, “The term premium exists... it’s a risk premium for the unknown going forward” (36:19), but also critiques the models used to measure it, stating, “The Fed’s models for term premium... are not particularly good predictors” (36:26). The discussion highlights the complexity and the contested nature of accurately quantifying the term premium, ultimately agreeing that while it exists, its practical application in trading remains limited.
Future Demand for U.S. Treasuries
Tracy and Ira explore the long-term outlook for U.S. Treasury demand, particularly in light of shifting foreign ownership patterns. Ira provides historical context, explaining that a decade ago, about half of U.S. debt was held by foreigners, a figure that has since decreased. He attributes this to central banks diversifying their reserves and private investors rebalancing their portfolios. Ira cautions, “We have to keep this in mind...Who’s going to be the incremental buyer?” (31:27), pointing out that the Federal Reserve’s substantial holdings also complicate the demand landscape.
Trump Administration's Influence on the Bond Market
The episode delves into the potential influence of the Trump administration on Treasury demand. Ira suggests that policy measures aimed at reducing the trade deficit could inadvertently decrease demand for U.S. Treasuries. He explains, “If the administration can get our trade balance better in line...it could result in structurally less demand for US Treasuries” (35:26). This scenario creates an existential concern for the administration, as a decline in demand for Treasuries could lead to higher borrowing costs and challenges in funding government deficits.
Joe adds a contemporary observation, noting that “the stock market is flying today...the dollar is less appealing” (43:09), indicating that broader economic shifts are influencing investor behavior and currency valuations, further impacting Treasury demand.
Conclusion and Final Thoughts
As the episode wraps up, Tracy and Joe reflect on the multifaceted nature of the Treasury market's volatility. They acknowledge that while technical factors like the basis trade and swap spreads played roles, broader structural changes and policy uncertainties have significant implications for future market behavior.
Ira concludes by emphasizing the need for a deeper understanding of the Treasury market’s structure and the various forces at play. He states, “It’s not always a fudge factor when people talk about technical aspects or positioning... the structure of the US Bond market is crucial” (42:02).
Notable Quotes:
- Tracy Alloway (01:26): “This was one of the biggest, most dramatic things that happened in a market that really, as I like to say, is supposed to be pretty boring.”
- Joe Weisenthal (02:31): “I got zero sleep because I was just refreshing my Bloomberg app... watching this yield spike.”
- Ira Jersey (09:09): “It was really the swap spread portion of that trade unwinding... the swap market was moving around 10 basis points.”
- Ira Jersey (11:45): “After President Trump won, the expectation was that the enhanced supplementary leverage ratio would be removed... led to negative swap spreads.”
- Ira Jersey (36:19): “The term premium exists... it’s a risk premium for the unknown going forward.”
- Ira Jersey (31:27): “Who’s going to be the incremental buyer?”
- Tracy Alloway (35:26): “It could result in structurally less demand for US Treasuries.”
- Joe Weisenthal (43:09): “...the dollar is less appealing.”
Final Takeaways
This episode of Odd Lots provides a comprehensive analysis of the unprecedented volatility in the U.S. Treasury market during April 2025. Through expert insights and detailed discussions, listeners gain a deeper understanding of the interplay between regulatory changes, structural market shifts, and policy uncertainties. The debate on the term premium and its practical implications further enriches the conversation, highlighting the complexities of modern financial markets. For those seeking to grasp the intricate dynamics of the Treasury market, this episode serves as a valuable resource.