UBS On-Air: Market Moves The State of Financial Stability with Steven Kelly (Yale) & Leslie Falconio (UBS CIO)
Apr 16, 2025
In this engaging discussion, Steven Kelly, an expert in financial stability from Yale, joins Leslie Falconio, UBS's CIO of Taxable Fixed Income. They explore the precarious state of the U.S. financial system amid rising inflation and geopolitical conflicts. The pair tackle critical fiscal challenges, the dynamics of the Treasury market, and the influence of shadow banking on stability. They also highlight the U.S. dollar's enduring strength and the vital role of central banks in maintaining market resiliency during turbulent times.
AI Snips
Chapters
Transcript
Episode notes
U.S. Debt: Quantity vs. Sustainability
- The U.S. fiscal situation is unsustainable long-term but the amount of debt is not immediately worrying due to strong global demand for safe assets.
- Short-term Treasury securities have insatiable demand, whereas long-term debt markets are more fragile and less liquid.
Recent Volatility Mirrors UK Crisis
- The recent Treasury market volatility resembles the UK's "Liz Trust" crisis with shocks causing long-end selling and forced asset liquidations.
- The key risk lies in market disruptions rather than traditional U.S. rollover fiscal concerns.
Fragile Basis Trade Explained
- The Treasury basis trade is a highly leveraged, fragile structure where hedge funds buy cash bonds holding long-term Treasuries and short futures to collect small profits.
- This trade is crucial to Treasury market liquidity but can trigger forced selling and margin calls during price divergences.