America’s Most Important Slidedeck

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Every quarter as part of its refunding announcement, the Office of Debt Management together with the all important Treasury Borrowing Advisory Committee, which as noted previously is basically Wall Street’s conduit telling the Treasury what to do, releases its Fiscal Quarterly Report which is for all intents and purposes the most important presentation of any 3 month period, containing not only 70 slides worth of critical charts about the fiscal status of the country, America’s debt issuance, its funding needs, the structure of the Treasury portfolio, but more importantly what future debt supply and demand needs look like, as well as various sundry topics which will shape the debate between Wall Street and Treasury execs for the next 3 months: some of the fascinating topics touched upon are fixed income ETFs, algo trading in Treasurys, and finally the implications of High Frequency trading – a topic which has finally made it to the highest levels of executive discussion. It is presented in its entirety below (in a non-click bait fashion as we respect readers’ intelligence), although we find the following statement absolutely priceless: “Anticipation of central bank behavior has become a significant driver of market sentiment.” This is coming from the banks and Treasury. Q.E.D.

Some highlights specifically from the TBAC component of the presentation.

First, the TBAC discusses key changes to the Fixed Income markets over the past few years:

  1. Reduced liquidity of spread product
  2. Likely a consequence of investor risk aversion and regulatory reform. Treasuries remain liquid
  3. Prevalence of “risk on / risk off” mentality
  4. Extreme valuations, correlations rising, excess returns becoming more volatile
  5. Role of government
  6. Extraordinary monetary policy (ZIRP, balance sheet growth, communication/transparency)
  7. Regulatory reform
  8. Changes in market participant behavior
  9. Cyclical (risk tolerance) and secular (demographics / LDI strategies), customized solutions
  10. Growing role of electronic trading
  11. Driven by increased efficiency and regulatory reform

Supporting visual data:

And what matters for bond traders everywhere: Implications of Reduced Corporate Bond Liquidity, which are mostly the lobby group’s efforts to neutralize the Volcker Rule:


  • A reduction in liquidity / wider bid-offer spreads has both an upfront cost to existing investors (who have to mark their existing holdings at wider levels) as well as an ongoing cost for issuers and investors
  • Per a recent study, a strict implementation of the Volcker Rule for the corporate bond market may cost $90-315bn upfront plus $12-43bn/yr for issuers and $1-4bn/yr for investors in future transactions
  • Analysis by Barclays** indicates that the liquidity premium has risen from ~20bps in Jan ’07 to ~40bps in Mar ’12
  • Policy makers should carefully consider the impact on market liquidity when introducing new financial regulations, such as the Volcker Rule
  • SIFMA, the Credit Roundtable (a group of large fixed income money managers), and other market participants have submitted comments on this topic
  • Given the size of the bond markets, it would be difficult, if not impossible, for the banking sector to reintermediate the capital markets (replacing bonds with loans) in response to a prolonged market dislocation