YouSaid · the spoken record

Darrell Duffie

lines on the record: 44
first: 2023-08-28
most recent: 2023-08-28
sittings or episodes: 1
sources: podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“Government securities market relative to GDP is going to be about 150% or more according to the projection of the Congressional Budget Office, whereas dealer balance sheets are shrinking relative to GDP over the last 10 years. That's not sustainable. So simply to say we don't want to disrupt the current market structure because the dealers won't participate as much in the primary market is not going to fix the problem. The dealers are now taking down on the order of 10% plus or minus in those auctions that number has been coming down over the years. I predict they will continue to participate in the market even if there is a change in market structure, but that is not in my mind an overriding concern to fixing the market structure.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“Certainly something that I've heard some at the largest primary dealers say publicly and in conversations, be cautious with changing the structure of this market because if dealers are not sufficiently profitable in providing intermediation in the secondary market for U.S. treasuries where they're traded, then maybe the primary dealers will not participate as actively by committing capital to the primary market, which is where they're issued and maybe that would cost U.S. taxpayers more because you wouldn't have a reliable, committed buyer at those auctions. That is a risk, but it's not convincing to me that you can sit back and try to sustain the current market structure when the treasury market is growing bigger and bigger while balance sheets are shrinking relative to GDP. The total U.S.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“By highlighting the importance of making the U.S. treasury market and other government securities markets more resilient to the problems that will arise as we get more and more stress coming from inflation, volatility, monetary uncertainty, sovereign debt risk uncertainty, not to mention geopolitical uncertainties. It's kind of a constellation of risks and you want to build a market that's resilient to those risks. And I think those that prepared the agenda for this meeting thought carefully about bringing all of these topics.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“that your listeners hear this is a lot of attention on fiscal risks. You're going to see the importance of increasing government debt and how that interplays with inflation risk. The work that we've been discussing today on improving the liquidity of the U.S. Treasury market dovetails well with the topic that I think will be the headline topic here of inflation and sovereign debt risk.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“Here, sometimes the misunderstanding that what we would be doing with central counterparties like FIC is to take all of the risk in the market and kind of like bulldoze it into one spot at the central counterparty, making this enormous stack of risk all in one failure point. That is not a correct metaphor because as you take all of these bilateral purchases and sales and bring them into the central counterparty, all the purchases almost get netted against all the sales, and you get a much smaller stack of risk as a result. The amount of risk goes down enormously. I mentioned a study done by the New York Fed that shows about a seventy percent reduction in settlement risk in the US treasury market from doing central clearing. So even though it is true you're concentrating the risk more in one place, The total amount of risk goes way down”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, it's true. I mean, you have to say, although it's considered a pejorative, that the fixed income clearing corporation is too big to fail and it would become even bigger. So even more importantly could not fail. You couldn't imagine the chaos that would ensue if the central counterparty for the US Treasury market were unable to meet its obligations and had to create an enormous crater on the global financial markets. So you are putting the onus even more on the safety and soundness of that central camera party. Now, and I think regulators are up to that. The fixed income clearing corporation has been designated as systemically important. It is on the list of financial stability oversight councils, infrastructure that must get too big to fail attention. I also”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“Terrific question. So, a former Stanford PhD student, Melena Whitworth, collaborated with two economists at the Bank of Israel on what happened in Israel in March of 2020. Israeli government bonds are traded on an exchange. It's not a dealer intermediated market. And that market came through, now it's not a comparison to the U.S. treasury market in terms of size and depth, but it came through without difficulty. Whereas most government securities markets did suffer in terms of liquidity in March 2020.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“In place in 1973. So while in the short run, the dealer has got a smaller share of the market and faced more competitive margins on each trade, eventually the volume of trade just dominated that effect. And I don't think any dealer would want to turn back the clock to the days before exchange-traded options. I predict the same thing would happen in the US Treasury market as around the world investors would need liquidity and a much higher volume market and dealers would be providing a lot of liquidity both on exchange and off exchange.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“Let me go back to 1973 when none of us were probably aware of what was going on and talk about the equity options market or stock options were being traded before 73 bilaterally through dealers, just as the treasuries are done today. Then the Chicago Board Options Exchange entered the market in 73. And in the very first month of trade, that exchange did more volume that had been done in any prior year in the dealer intermediated market, and dealers had a fraction of that trade which was small fraction but big volume since 1973, volumes in the equity options market because it was exchange traded have grown by many orders of magnitude on the order of a million times the volume of trade that”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“You do simply by forcing the issue, but this is the classic private cost public interest kind of trade-offs that where you need the official sector to step in and make decisions. And by the way, when I said earlier as a dealer firm, I might not favor this because of the costs and because it's threatening my market share and my profits. I think if you take a really long perspective on this, there's a chance that all-to-all trade would massively increase the volume of trade in the US treasury market.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“Investors in the market could say, Well, I could trade directly with another investor and I wouldn't be reliant on my dealer to settle my trade for me if only a trade platform operator would offer that service, I'd be all in. And then trade platform operators will say, wow, now that we have central clearing in this market, the barriers to enter into the intermediation of this market are much lower because investors can settle directly at the fixed income clearing corporation or whatever central counterparty they choose. So I think it would organically lower the barriers to more all-to-all trade.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“With Tracy, that $210 billion gets netted down to $10 billion facing fixed-income clearing corporation. So that massive reduction in my settlement risk is really beneficial from the viewpoint of using my balance sheet efficiently. There was a study done at the New York Fed year before last by Michael Fleming and Frank Keane, two of my other collaborators, in which they showed that on the peak days of the March 2020 COVID stress, the settlement in one day for the U.S. Treasury market facing the dealers was in excess of a trillion dollars. And had those tradesmen centrally cleared, it would have been as low as $300 billion, about a 70% reduction. Now, that not only relieved some space on dealer balance sheets, which is one of the key problems here. If the central clearing is done effectively and a kind of straight through anonymous way, then”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“Okay, good. So let's just back up and describe what it is. In the current U.S. Treasury market, the dealers are required when they trade with each other to settle their trades through the fixed income clearing corporation, which means that they're not facing each other for settlement risk. If I trade with you, then tomorrow I'll settle my trade with the fixed income clearing corporation, and so would you. That lowers our bilateral risk and also allows me to net down my purchases against my sales. Because if I buy from UJo and I sell to Tracy in a bilateral world with no central clearing, I've got two settlements coming up that I have to pay attention to both of them from the viewpoint of settlement risk and settlement failures, meaning the trades are not done. If I can net $100 billion of purchases from you, Joe against, say, $110 of sales.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“the securities and exchange commission recently unanimously proposed broad central clearing in the u.s treasury market i don't think there's that much resistance among the other key players in the official sector in the case of the treasury market those key players are the sec itself the new york fed the federal reserve board and the treasury department i don't see a significant amount of resistance across those four key players but it's not easily done first it's a difficult design process itself what is exactly are the requirements going to be and secondly there is going to be industry resistance and even without singling out any particular regulator i think industry pushback on the cost side of that is understandable and it's going to have to be overcome because leadership and the official sector is going to be needed to push that through.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“Design in and of itself. It's difficult. It's a difficult design process. And secondly, there's a lot of trade in that market that should be done bilaterally with dealers for very large block trades. And dealers need to be involved in the provision of liquidity directly to investors. So in my view, that all-to-all trade needs to happen in a way that the market is guiding, but there can be a nudge from other rules that would lead that way. An example being central clearing.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“Okay, well, the most influential market participants from the viewpoint of designing and innovating market structure are the dealers themselves. And if I were in the executive suite of one of the largest dealers, I don't think I would necessarily campaign to introduce a new set of competitors for my trade, lowering my market share, and reducing my profit margin on each trade. So it's kind of understandable that to the extent that the market hasn't evolved, that dealers haven't been pushing for that. By the way, I'm not advocating that the Fed should mandate all to all trade or other regulators should mandate that. I think it needs to happen organically, because if it's a rule requirement that trades in the treasury market must be all to all, well, first you have to define what that means, and that's going to gum up the market.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, Joe, I mean, the Fed has already predicted that it's going to make those losses pass through to capital And I predict personally that they will also include interest rate risk scenarios in their stress tests. I would not be surprised to see both of those in soon.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“Second thing you can do, which surprisingly the Fed has not done recently, is to include shocks to interest rates as a scenario in their stress tests so that banks would need to demonstrate that even if the yield curve were to jump up a couple of hundred basis points, they would have the capital necessary to weather that storm”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“No, you would still need to do that, but you could do that through a couple of measures that have been proposed that came up after the failures of Silicon Valley Bank and other banks. So one thing you could do, which should be done, is that the very large but not GSIB banks, like those big regionals, should be required to pass their losses due to interest rate risk through to their capital accounts so that when they lose money on treasuries, they have to add capital to replace that. They were exempted from passing through those losses.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“Even central bank deposits, you have to have a certain number of dollars of capital that doesn't depend on the risk. Well, in my view, that's backfired, and it's led to more illiquidity than necessary. You could still have the same amount of financial stability with less illiquidity if you dial back that rule and dial up risk-based requirements so that the system-wide you're just as safe as you were before, but each individual bank is not internalizing the cost of balance sheet space when it makes trades of safe assets.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“That's right. There's been a kind of go around in the world of capital requirements for banks. Back in the 80s, we went from a world where there were just basically leverage requirements that did not consider risk to a world in which the financial regulators were saying, hey, wait a minute, we should be waiting these assets by risk because that's what matters for insolvency. And then it was discovered leading up to the crisis and failure of Lehman that banks were playing games with their risk-based measures or simply the measures were not accurate enough. And so as a backstop or just in case the supplementary leverage ratio rule was introduced to eliminate from the viewpoint of that capital requirement any consideration of risk saying, you know, no more games and no more uncertainty about how much risk, we're just going to require for every hundred dollars of assets of any kind.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“We're relieved of that risk by the Fed's trades, but from the viewpoint of that supplementary leverage ratio, it was very unfortunate. And I and others have argued that the SLR, supplementary leverage ratio rule, should be replaced with higher risk-based capital requirements.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“Penalizes the provision of liquidity even for very safe assets. Let me give you an example. When the Fed was buying treasury securities from mid-March, it bought within three weeks nearly a trillion dollars of treasuries. And one might think, oh, thank goodness, that's lowering the, making more space on dealer balance sheets for other positions. However, from the viewpoint of that capital regulation, there was really not much change at all because the Fed paid for those trillion of treasuries with a trillion of reserve balances. And reserve balances, although perfectly safe and liquid, have the same impact on dealer capital requirements as the Treasury securities that they replaced. So there wasn't really from the viewpoint of the supplementary leverage ratio much benefit of the Treasury's purchases. There were benefits in other respects because treasuries are risky and dealers”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“Okay, it's very tough because those much more demanding capital requirements and other requirements that came in after the financial crisis have clearly reduced liquidity in a broad set of financial markets. It's glaringly obvious. However, we can't afford to return to the pre-Lehman days in which dealers would expand their balance sheets for a few basis points of arbitrage, creating financial instability. So while those new capital requirements are necessary for protecting the economy from collapse of the financial services sector, we do need to substitute for the liquidity that's missing in other ways. There is one capital regulation that I think is not necessary, and that's the one you mentioned, Tracy, the supplementary leverage ratio. That rule”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“Not quite. We can only see dealer balance sheets on a weekly basis because the Fed has a data set called FR 2004, which collects those data only on a weekly basis. And summaries of those data are available publicly on the New York Fed's website.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“So after analyzing all these data and discussing what's driving these, then we turn to writing up our results. And there's a lot of iterative work there, which you can see in the paper that we wrote.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“quantile regressions and a number of other statistical approaches. And then we would start to see the patterns emerge very, very clearly that I described two key patterns that came up over and over again in our discussion meetings were A, volatility seems to explain most of the variation in liquidity, but B, when it doesn't, it's dealer balance sheet loading that explains the remaining part of illiquidity. It's a highly nonlinear effect. When dealer balance sheets are normally loaded, they don't contribute to liquidity. But when they're reaching their extremes where dealers are handling more treasury trades and more agency MBS trades than they've handled in the past, then you see illiquidity.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“liquidity in the U.S. Treasury market. And then we get feedback saying, yeah, this looks good. The way that Prusada are being presented will not reveal proprietary information. So go ahead. And then we can do the same thing with dealer balance sheet data. We can get exposures of a dealers not only to treasury securities, but to agency mortgage-backed securities, which turned out to be another big load on their balance sheet, particularly during March of 2020. We can go to a wide range of data sets, and we wrote a paper that explains the extent to which we access all of these data, bring them together. We developed 18 different liquidity metrics and many different metrics on how dealer balance sheets are being loaded. And then we would analyze these using reasonably intricate econometric methods like”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“And at the same time, in the background, we're collecting volumes of statistical data. The Fed, because it's a member of the official sector, has access not only to its own data, but to exceptionally fine-grained data at the transactions level. Let me give you one example. There is a data set called Trace, which records every single trade in the treasury market with a few minor exceptions. Those data are only available to the official sector. They're not available to the public. And by the way, I disagree with that policy, and we could talk about that. I think it actually contributes to the problem of illiquidity. But in any case, the Fed, as a member of that official sector group, can go to its sister agencies in the federal government and say, look, we have this project, here's its objectives, we want to use these trace data to analyze.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“For this particular project, it was a combination of meeting and discussing what needed to be done with economists that I mentioned earlier, and those would be weekly meetings pretty in-depth where we would go through what we've already learned and what we need to do next. And that happened for six months or so”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“The broker tech market are high frequency trading firms, sometimes called principal trading firms like Jump, like DRW, like Citadel, firms that have a very special purpose of intermediating in the interdealer market, taking little bit offer spreads from the dealers and from each other. That's the basic structure of the market. Again, the notable feature is if you're an investor, you can trade only with a dealer. If you're a dealer, you have the ability to lay off positions in the interdealer market.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, it's an extremely complex structure, but it can be summarized pretty simply. There's two segments of the market. There's the interdealer market in which the dealers trade among themselves, and then there's the customer-to-dealer market in which investors around the world trade with dealers. Notably, investors do not trade directly with other investors. There is no alt-to-all trade in the U.S. Treasury market, no matter whether you're an insurance company, a hedge fund, a foreign exchange reserve manager. you are going to be buying and selling with a dealer. If you're a dealer, on the other hand, there is a very active interdealer market for the on-the-run securities. Those are the latest issues of the treasury. There's an order book market, which is a high-frequency trading market run by BrokerTech, which is a subsidiary of the Chicago Mercantile Exchange, where you have the same kinds of high-frequency trading that you see in the stock market. The only other participants on”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“Very, very liberally over the past couple of decades. The other concern is once the balance sheet is large, it eventually is going to come back down and those treasuries are going to be adding to the stock of securities that other investors need to have. And it means that the central banks, including the Fed, need to do that very gingerly. There's a lot of volatility in the Treasury market, and the Fed is letting its balance sheet come down. Other investors are having to pick up the load. It's easier to expand the balance sheet than it is to bring it down. So using the Fed's balance sheet, while it's necessary, is not a painless solution. And I would argue it's not the best solution anyway. We can do better by improving market structure, pushing out into the extreme tails the number of events in which the Fed needs to step in and buy.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“The Fed does need to be there. It's not as though one should say, let's take the Fed's balance sheet out of the equation and try to do without it. It needs to be there. It's a backstop. It's the last resort. The Fed is the buyer of last resort after it's become the lender of last resort. It can't do anything else but bail at the market by buying securities. But relying on that has several problems. I already mentioned it's not 100% effective on the first day. And there's also the size of the Fed's balance sheet. That's controversial. I mean, even if you think it's innocuous, it raises political concerns. There are those that say, well, maybe the Fed's balance sheet is too big and we need to curtail the ability of central banks, including the Fed, to expand.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“My wrong way risk point. If I'm looking for a market that's going to work for me in a crisis, I don't want to have to wait weeks in order to get liquidity or to pay a low cost for liquidity. I want it to be working all the time. Now, of course, it's unrealistic that it should work every single day. But if we rely only on central banks, and I speak more broadly to bail out their government securities market when they get into trouble, it's not going to be 100% effective. And it raises more hazard. It says to the rest of the world, we'll use the central bank balance sheet to bail you out. You don't need to focus on improving market structure, reducing undue leverage. We have your backs. That message, while it needs to be there, is not a substitute for improving the market structure.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“You're so wrong. No, the Fed came out guns blazing, unlimited financing in the repo market for anyone that had access to the Fed. A trillion dollars of purchases in the first three weeks, nearly a trillion, of U.S. treasuries, relieving dealer balance sheets of their overloading, getting the supplementary leverage ratio dialed back and it was causing problems, took a little longer and it took, I think, some backroom negotiations with the other bank regulators to come on board. So that got delayed and that was a problem. But the Fed did a terrific job at crisis management during those weeks. And I say weeks because they didn't solve the problem. They only made it less bad than it otherwise would have been. It took five, six, seven, eight weeks before market liquidity was restored. And again, going back to”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“Why not? Well, because A, this is the linchpin of global financial market stability. You want it to work day in, day out. And B, if you discourage safe haven investors from believing that even though everybody else is liquidating that day, they could also liquidate at low cost with ease, then they won't use the U.S. Treasury security as much as their safe haven. They'll diversify. And that's what we've been seeing somewhat over the last couple of decades, a degree of diversification away from the U.S. Treasury, still by far the dominant Safe haven, something like 59% of foreign exchange reserves are held in U.S. treasuries. But from the viewpoint of U.S. taxpayer, you want everyone to believe that on the worst day in a thousand, that market is going to be there for them.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“If I'm, let's say, managing the foreign exchange reserves of an emerging market central bank, when do I need to actually take advantage of the depth and liquidity of the U.S. Treasury market? It's that one day in a thousand when all the other safe haven investors are trying to do the same thing. In the paper that Tracy mentioned, I'm giving here at Jackson Hole, I talk about this wrong way risk from the viewpoint of illiquidity. You don't want the market to be great except on that very singular day on which everybody needs the liquidity.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“Josh, I've known him since he worked at JP Morgan, and now that he's moved to the Fed, we get to talk a lot more. This is a terrific insight that he has. Do you really want to design a market for the worst day in a thousand? Isn't that very expensive and maybe overdoing it because 990 days out of 1,000, you didn't really need that kind of a market structure? I'm going to be a little provocative here. Okay. I think you do want to build a market for the worst day in a thousand for the following reason.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“As long as U.S. treasuries are the world's most important safe haven, which is clearly the case by Miles, that's always going to be the result for basically two reasons. Number one, a whole lot of major investors like foreign exchange reserve managers, firms that are storing safe liquid asset just in case, well, the just-in-case happened and they are going to liquidate those positions. The other channel for this is as the volatility grows and uncertainty grows, a lot of investors are kind of finding it too hot to handle and they have to unload some risk and treasuries are the easiest. Security to unload in the world. The market's got a good reputation for being the deepest and most liquid market in the world”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, well, both. The direct kind of fundamentals, fiscal, monetary fundamentals and the global economy and geopolitics recently all play a direct fundamental role. And then as you alluded, there's also kind of a feedback effect. When volatility rises for fundamental reasons, dealers are going to struggle with providing sufficient liquidity to the market. To the extent that dealer balance sheets are not sufficiently flexible to accommodate the provision of liquidity to the market, that in and of itself increases illiquidity, increases volatility, and they kind of feed back on themselves. And you can get an episode like we had when COVID hit in March 2020, where liquidity becomes even worse than would be suggested by volatility alone.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“Higher and higher market becomes less and less liquid. It's an extremely regular relationship. About 80% of illiquidity is explained simply by variation in yield volatility.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“And the Fed is struggling with what to do about inflation, that additional monetary policy uncertainty also contributes to volatility. Let me back up a minute. I just spent most of the last year on a sabbatical at the New York Fed and working with some terrific economists there, Michael Fleming, Frank Keane, Orchard, Peter Van Tassel, Claire Nelson. We decided we needed to look into the relationship between the volatility that you two discussed and the liquidity in the market. They're closely intertwined. So we dug deep and went into a lot of data. And yeah, volatility seems to be the main determinant of illiquidity in the market. So when fiscal uncertainty or debt ceiling debate or a COVID crisis or monetary policy uncertainty start to get a volatility.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, over the past century, there have been, as you suggested, many episodes of increased volatility and liquidity problems in the treasury market. But I do think these are happening more frequently. Just recently, I think you summarized pretty well some of the stresses in the Treasury market coming from the fiscal side. The U.S. is issuing more than people expected. There was a recent downgrade by Fitch.”
2023-08-28 · Odd Lots · Darrell Duffie On How to Fix the World’s Most Important Market · IDENTIFIED FROM THE TRANSCRIPT · source