That kind of became the zeitgeist. This is unfair and some of them are bad, some of them will default.

But broadly speaking, if you have a broad enough diversified basket, you'll make out like a bandit. And that was the cornerstone realization of what became a pretty incredible junk bond empire.

Welcome to Top Traders Unplugged. In markets, success doesn't come from predicting what happens next. It comes from being prepared for what you can't predict.

In each episode, we go deep with some of the world's most thoughtful minds in investing, economics and beyond to understand how they think, how they prepare and how they decide, and the experiences that shaped how they see the world. No noise, no shortcuts, just real conversations to help you think better and invest with confidence.

Welcome everyone to Top Traders Unplugged.

My name is Kevin Coldiron and I'm host of the Ideas Lab series where we talk authors of new books that help us understand and navigate the global economy. Our guest today is Robin Wigglesworth. He's a longtime financial journalist and currently editor of the Financial Times influential Alphaville blog.

He's the author of the book Trillions, which traces the evolution and future of passive investing. And he's here today to talk about his brand new book coming out in September, of Fabulous Debt, the epic story of how bonds built the modern world.

Robin, thanks so much for joining us and welcome to the show.

No, thanks for inviting me, Kevin. I've been looking forward to it.

First of all, I feel like I have to start off by congratulating you on your market timing. You've managed to release a book about the bond market just when pretty much all anyone can talk about is the bond market.

How did you manage to pull that off?

The first draft, I was like, oh my God, should we try to rush this out?

And the publisher pointed out the multitude of logistical issues around this, but also just the fact that ideally a book, if there is something going on that is particularly pertinent, that's great. But you write a book to stand the of time, so you can't try. And it's like market timing, you shouldn't try to go crazy doing so.

But I felt always confident that there's always something interesting going on in the fixed income market somewhere in the world and low there is right now. Again, yeah.

Well, you know, it's interesting that you say that about your publisher because really, this is a history book. It's about the history of the bond market. And I'd actually like to start off with a, a quote about history.

From your introduction, you quote Lytton Strachey, who was a biographer and I think also a close friend of Keynes, who says ignorance is the first prerequisite of the historian. And I'm curious how you interpret this because I have to say I've thought quite a lot about it since reading it.

I mean, to me it means we should kind of clear our minds of preconceived notions when we think about history. But then on the other hand, if we're always clearing our minds, what is the value of learning history, right? I mean, what do we take away?

So I'm curious just why you chose to use that quote and what it means to you.

It's a great question actually, because I thought a lot about it as well when I came across it in a different book. I mean, for me it has two meanings, both of which felt very relevant for this. One thing is, yes, start without those preconceived notions.

I mean, we can't entirely ignore lessons, the history of the, sometimes the knee jerk prejudices we might have.

But try to start, you know, from a place of ignorance because almost the journey also becomes more joyful than it's, you know, you're discovering things for the first time or, or relearning things, or seeing things you thought you knew from a radically different perspective.

The other part is also, you know, something that's relevant for certainly historians, but also just journalists in that the world is immensely complex and you know, we need to find a balance between sort of embracing that nuance, the complexity in writing about it, but also writing in a clear way that, you know, we need to kind of bring forth the core truth, as it were. I mean, not sort of stretch things, but, you know, maybe cut off stuff that's extraneous.

I mean, you work in a financial environment a lot of like, for good traders, it's about cutting out stuff that isn't actually essential to hone in what actually matters. That doesn't mean you're not seeing an entire picture, but your focus, focusing on the factors that matter the most.

For a journalist, like writing a thousand years of bond market history. There are so many, I guess, tech people who call it side quests I could have gone down and some of which broke my heart not to pursue.

So I love writing about sovereign debt restructuring, countries going bankrupt, and there is a bit of that in the book, but I was going to have a whole section on it. And I realized it was fascinating, especially to me, but it wasn't really that essential. Then there's the issue of linkers.

The linking, like an inflation truth bond, were invented in the US Even before the US existed as a country. Massachusetts issued them. And they're fascinating as well. There's so many other aspects that are interesting that I didn't really.

I felt I needed to clarify by simplifying and other things I didn't think I was going to write that I did end up writing about instead.

Yeah, I appreciate that because I did get that sense in reading the book. There was a couple times where you're like, would really like to talk more about this, but we're going to go back to bonds.

Well, this is it. I mean, when you write about something like this, it's so easy to get distracted.

Like history of central banking, the history of money, history of financial markets more broadly. And sometimes I felt it unavoidable. So there's lots on Bretton woods and the Nixon shock.

Just because I feel you can't really understand the trajectory of bonds in the 20th century when really we saw that was kind of the real.

The ascent of the fixed income markets without really understanding the backdrop, but still kind of keeping the idea that the hero of my story is the bond, the humble bond. He usually is the protagonist and everything else is a supporting character.

Okay, well, let's talk about the history of the humble bond. I guess you talk about trying to pare things down to core themes. Here's the kind of two core themes that leaped out to me in the book.

Number one was that a well structured and functioning bond market can essentially turn borrowing into a source of strength. It allows the issuer to prosecute wars, finance, infrastructure, all the things you need to build and maintain power. That was number one for me.

And number two was that this proper functioning is really what you call the technology of how the debt works. That advances in power are often linked with changes in the how the bond. The technology of the bond works.

Those are the two themes that really, I thought, leapt out to me. And I thought maybe we could use some stories from your book to illustrate those ideas. So perhaps we could begin with, begin at the beginning. Venice.

Can you tell us how the Venetians came to develop a bond market and the role that that kind of played in supporting their rise as a power?

I mean, by complete accident, I mean, in fact, they lost the war and that's how it was born, almost. So Venice was the rise in commercial power in the 12th century in the Mediterranean. It was kind of the perfect bridge between east and West.

They were a republic at the time of everything else in Europe was an autocracy. They technically were ruled by Constantinople, the Byzantine Empire in Constantinople today Istanbul.

But they were a Catholic Christian countries, so they also owed some fealty to Rome. But essentially they didn't care. They just traded with everybody.

They traded with Christians, they traded with Muslims, they traded with north, the south. Commerce was their ultimate loyalty and that made them fabulously rich, but annoyed everybody else around them.

And eventually Constantinople got so upset with its uppity, not quite colony, but their uppity vassal state that they essentially decided to imprison every Venetian in Constantinople and the Byzantine Empire.

And in this huge, actually incredibly impressive one day raid, we're talking tens of thousands of people and they didn't leak out, which must have been astonishing back in those days. But Venice decided, well, we need to teach our suzerain a lesson then.

So they were going to sail a fleet and get their revenge and free their citizens. But they needed money to do so because back in the day those states were tiny. Like the state itself was small.

Venice was rich, its people were rich, but the state itself was tiny. So they always borrowed money from the money lenders, the banks that were starting to crop up in Italy around then.

But this required a far greater sum than you can just hit up a few banks for. So they essentially force all Venetians to pay a war tax, a one off war tax to the government that was proportional to their wealth.

They assessed the wealth of everybody in the city and made everybody pay it. But to kind of soften the blow, they said, well, we're going to pay you 5% a year until we can repay this loan, this forced war loan slash tax.

And look, if you're hard up for money, if you happen to need cash, we're going to make it traded. We're going to keep receipts of every loan that people made us. And you can trade those receipts.

Essentially you have to go down to the finance ministry and say, I've sold X amount of this prestiti from,.

I.

Don't know, Paolo to Luigi. And that was okay.

And they built this massive fleet, sailed to Constantinople, but prevaricated, was struck down by the plague and had to return, for want of a better phrase, with her ass between the, the tail between their, I mean it was embarrassing. And also even worse, they brought the play back to Venice. So the doge, because it's a republic, he had to Defend this in front of all his citizens.

He was summoned there and he was trying to explain. And the crowd was getting angrier and angrier. And in the end all these advisors just very quietly tiptoed out.

And eventually somebody started to attack the doge. He ran, he fled, but was beaten to death and stabbed on the streets of Venice, murdered for, for, for mismanaging this war.

But of course, Venice couldn't pay that loan now that war tax. So it just became permanent. But it proved magic.

Suddenly people had something that they could buy, an income stream they could endow, give their daughters a dowry in the form of this. You could use it as collateral for trade. For the Venetians, that was particularly powerful.

So suddenly in Venice's misfor, an incredibly powerful financial tool was made. And the, the core things was that it had a fixed interest rate that was key because it gave them sort of assurity.

You were buying this and this would pay you X ducats a month, for example, or a year, it was twice a yearly it was paid and that you could trade it. It was designed to be tradable and it wasn't a bearer bond. You had to register new buyers and sellers.

But it was fairly easy to go down to the Rialto in Venice. It's still there. It's a, a fresh food market now. But that was the world's first bond market.

And then you just bought and sold stuff and you'd wander over to the nearby finance ministry and just register the new owner, essentially. And it was such a great thing that the Italian city states copied it and it just spread out from there.

It seemed to me that the key to the success was the absolute, or I guess two things.

One, that seemed that this kind of absolute determination not to default, so that it became, you know, it may be not quite as good as gold, but pretty close. And secondly, that the bondholders were also citizens. So they had a stake in the whole system.

Yes. So they never default. They did default many hundred years later, but essentially they never fully repaid it.

They would pay it down because Venice rose again and in fact did get revenge on Constantinople.

They seized Constantinople 20, 30 years later, I think, and actually seized four beautiful bronze horses, Greek era horses from Constantinople stood on the hippodrome in Constantinople and you can still see them today in the cathedral there. And so they were able to use this as sort of almost like rocket fuel for the economy.

I mean, Greece, it kind of, in a world where like, there's no digital money, it's just specie and trade actually Having something that kind of looks, walks, quacks and talks a bit like money is incredibly powerful for a merchant city.

But it is also particularly powerful because it kind of entrenched democracy, because it gave citizens who owned this a vested interest in the proper governance of their own city state. So Venice, also the republic, the democracy of it, I mean imperfect by today's standards, but revolutionary for the era, became entrenched.

And also they started publishing transparent state finances. They actually published what the government was spending and taking in.

And in a world of autocracy, this was a little island of accountable quasi democracy. And it kind of shows that bonds can have multiple facets to them and can actually sometimes have positive unintended consequences as well.

Not least making its citizens creditors citizens essentially and binding them even more closely together.

Yeah, I thought that was just such a great example of like you say, borrowing, I suppose, has a negative connotation, but this was a great example of how it was in some sense an asset to the Venetian Republic.

Can you explain why that consolidation was a such an important kind of event?

It was again, sort of emergencies. It's generally emergencies that push this forward. But they've been issuing happenstance, new loans, new war taxes here and there.

And then they kind of realized, well, actually it's easy if we just consolidate this into a monte, literally a mountain of state debt.

But despite the negative connotations that a mountain of debt sounds, having one homogenous pool of debt is even more powerful because first of all, it makes it far more easy to trade. You're not worried, am I buying this bond or that bond? What's better or worse? It just makes it far easier.

And you can kind of see the contours of what the bond market is going to be. It's like freely tradable, homogenous and a fixed interest rate.

The Venetians, because this was actually quite an incredible invention, they wouldn't let non Venetians buy, or only very rarely. It was an honor they bestowed on certain foreign were allowed to buy Venetian bonds. So still fairly a very city centric bond market.

And then each Italian city state just basically copied and pasted it. But you could see that sort of they taking the basic idea and starting to evolve, like improve on the technology gradually.

And that's what we've seen Ever since.

Yeah, and that's actually a good unplanned, but good segue into my next kind of question, which was going to leap forward a few hundred years to talk about the uk.

I believe you describe the UK bond market as eventually becoming the first reserve asset, which implies that a leap forward was creating a bond market where it could serve as stores of value for, for non citizens. So I thought maybe you could explain the UK experience with the birth of, as you say, bonds is the first kind of reserve asset.

Well, it started with what the UK calls the Glorious revolution, though it was not considered glorious or revolution at the time. So the Dutch probably took the Italian invention of a bond market and improved it the most.

They created the first true bond market with different states, different towns, different water utilities, water boards, companies.

They were very thrifty, they're very saved.

And they invested in bonds and used bonds to frankly managed to beat down this hyper power of the area, the Spanish Empire, and gain independence after a fairly sort of destructive hundred year war. The Brits kind of felt they'd kind of fallen behind another Protestant country, the Dutch. And this is time of huge religious tumult.

The Dutch famously sailed in and raised the Royal Ship shipyard in England. So it was this sense that the Dutch, this tiny country that wasn't even a country until recently, have surpassed us.

So a lot of the elite in England, basically, I mean, I use the phrase copy and paste, but that's what they did. They imported a Dutch prince and copied over a lot of Dutch financial practices and ideas.

So that's led to the birth of the bank of England, for example. It was still a state chartered but private bank then, but they also started moving towards a more consolidated holistic bond market.

It took a long time, but eventually we saw the birth of something called consolidated annuities, because it was all these different annuities, as they were called, consolidated to one pool. And they used to pay 4 or 5% and you typically say they're going to pay 4%. And at times of war there were perpetual bonds.

Countries always issued perpetual bonds back then. The interest rate didn't tend to change that much. They issued at 4%, 5%, but if demand wasn't Sufficient, they'd sell it at a discount.

So you could buy, let's say a 4% consolidated annuity at 90 pence on the pound, if people are worried about the UK. And then when the UK was doing well, maybe that'd be trading at 110 pence. So now it's the real. Definitely, you can see today's bond market there.

And the essential new thing was that, that the Netherlands was a collection of lots of states and they were very mercantile. They were kind of. They'd taken over the great commercial, most commercial people in the world, probably then.

But it wasn't one sovereign nation state in the same way England was. And in fact, that proved not just very attractive to Brits, but to the Dutch. The Dutch bankroll the UK to a huge extent.

You know, there's a reason why even the Americans during the Revolutionary War, they went to the Netherlands to ask for loans. They were so the bankers to the world and English took advantage of it. But that's kind of. I'd say the first bond is that Prestiti in Venice.

And then you can decide whether is it the birth of the bank of England and it's the bond that it backed, or is it some of the later issues like the consolidated annuities? But it was, I think, the Brits that really showed how you build a national sovereign bond market and the power that that can give you.

And what was it about the consoles that allowed them to serve as a reserve asset?

Well, that didn't start immediately, though foreigners did buy them. But it's because, partially because of the Glorious Revolution, also lessened the power of the royals.

So back in the day, if you lent money to Spain, really what you were doing, you were lending money to the Spanish king. And push comes to shove, the king can chop your head off. So lending to autocrats is always a bit dicey.

But in England, it started shifting out of the royal family and Parliament took more and more control of the purse strings. So it was Parliament that was issuing these bonds, England as a country, not whatever family was sitting on the throne at that point.

And they also started again, a bit like the Italians publishing more transparent state finances and the fact that the Parliament could keep the king in check.

The word checks and balances, actually, it's incredible reading what some Dutch merchants would say, why they started investing in Britain, because they just like that. And then over time, that bond market made Britain more powerful.

One of the reasons, a large reason why England was able to beat Napoleon eventually wasn't. I mean, Horatio Nelson and the Duke of Wellington did an incredible job.

But England was only able to fight for so long against a far larger enemy because it could fund itself to an enormous degree by the bond market. Even Napoleon marveled at how England could do this. So he called Britain a nation of shopkeepers, rather pejoratively.

But it was then afterwards you can see that England was triumphant and the British bond market was huge. But because people trusted England to keep paying those bonds, they never defaulted.

They just became kind of portable money in an era where, yeah, again, gold and silver sometimes were in short supply. So it just became something that was valuable.

And if England or English merchants wanted to buy something, a lot of people around the world, certainly in Europe would accept consoles as payment. And that's, you know, the word guild is the Dutch bonds that was considered super safe, issued by the Holland, for example, the strongest province.

So there have been some quasi safe currency. So reserve currencies before the Roman denarius has cropped up all the way in China and India.

We've found hordes of Roman silver coins showing that both those are current accounts deficit with Asia, but also that they did accept Roman coins. But I think in the sort of semi modern era, the great British bond market, the consul market is the OUD treasury market.

Essentially it was for several hundred years.

It's an interesting through line, isn't it?

Because Venice, then the Dutch Republic and then the uk, they were all kind of early forms of democracy and the bond markets developed sequentially in those states. And that doesn't seem to be an accident.

It seems like there has to be some sort of, I don't know, external disciplinary mechanism to give the bond market or give the investors some sense of that they're not just that they're going to get repaid.

Yeah, I mean, it's, I mean the true aspects of this one, which actually surprised me when I was doing research for this one, which I knew that broadly speaking, the countries that have been successful are the ones that have nurtured bond markets and have frankly embraced finance. I mean, finance, you know, is not very popular. It has never been popular.

There's a reason why every single major religion has some prohibition against interests or usury. It still is today. It's not popular. But broadly speaking, the more financially sophisticated a country and economy is, the better it has done.

It has better been able to mobilize the wealth of its citizens to reinforce that progress essentially. And the Bond market is a great example of it.

So I knew even before I wrote the book that I was very confident that as I was studying this more and more, that strong bond markets lead to stronger countries and stronger countries lead to stronger bond markets. And it's a positive feedback loop.

The one thing that surprised me, which goes back to the citizen credited citizen aspect in Venice, is that to what extent actually the bond market helped entrench and spread democracy in Europe.

And it goes back to again, England, because people felt more comfortable lending money to England because it was a democracy, because it had representative democracy and it controlled the powers of the king. But the parliament was also controlled. There were checks and balances and that was why people felt.

And then London and England could borrow more cheaply.

And that again strengthened its advantages when other countries realized that they too also implemented, at the very least, certain democratic reforms, certain transparency measures. And the most most obvious way of seeing this is Prussia.

So that the precursor to modern Germany after the Napoleonic wars went to Nathan Meyer Rothschild, or the Rothschild family in London that was emerging as the big of the bond kings of the era, and said, we want to issue a bond in England. And Rothschild said, well, sure, you can do that, but you have to do it in pounds.

And British investors will want to see you control the power of the King of Prussia and publish some numbers. You'll have to do these things. And there's letters. Neil Ferguson, the historian, has written fantastically about this.

And it's quite remarkable seeing how supremely wealthy but still a Jewish family in an era of rampant prejudice in Europe is writing letters to the finance minister of Prussia saying, just forget it, son. You aren't going to get this money unless you do exactly what I tell you. And Prussia did commit.

I mean, they kind of backtracked on a few things, but again, you can see that you start seeing it kind of them moving in the right direction.

And I don't think the bond markets have helped democracy flourish or anything like that, but it was kind of on the side of the angels, one might say, and was a reinforcing factor in that general push away from autocratic royal families that we saw around that.

This is going to take us a little bit off piece.

But before we move from Europe to the US I wanted to ask, as I was reading this section talking about how both Venice and then the UK had big leaps forward when they consolidated their various bond issues into a single issue, I started thinking about the current state of Europe and how it seemed to me a little ironic that the birth of the modern bond market was in Europe and was turbocharged by a consolidation of individual state debts. And that's really what you're looking at a situation now in the eu.

And I don't know, do you, do you have, do you see that parallel and do you, do you kind of see there's any chance that maybe that they'll kind of learn, relearn the lesson of history and have some type of consolidated debt that, you know, might turbocharge the, I don't know, power of the European Union?

Yes and no. I mean, to deal with the consolidated debts, I do not think we're ever going to see that.

Unfortunately, in that true sense of the way people talk about euro bonds, European government supranational bonds, we have it a little bit in bonds issued by the EU and the European Investment bank and the European Stability Mechanism that kind of are kind of, I mean, I'd say they are eurobonds, they are jointly guaranteed and they are the responsibility of the taxpayers across the region.

But in the sort of total sense where they issue European Treasuries and it's the birth of the European treasury market essentially in euros, I think that the sense of nationhood is a little bit too entrenched for it's essentially, it's always, you can see this in the US where the US was at 1 point a creditor nation, like every country in the world owed the US money and that obviously informed how the US thought about things. Now, of course, the US is a debtor country, it thinks completely different about these things.

And then Europe, you know, maybe at some point the south has a renaissance and the north goes down, you know, but broadly speaking, there's always going to be somebody nobody wants to essentially be seen or seen to be sort of bailing out their neighbors, as it were. So I sad, I think it would be a great thing, but I think the Europe can get a little bit way there.

And I would say that I'm way more optimistic than I was about some of these, than before.

I mean, I covered the Eurozone crisis, I covered the financial crisis and, and if I'd gone back 10 years ago, the idea that European policymakers would be talking gushingly about capital markets and securitization and joint financial regulation, all these things, I mean it would have been unthinkable. I mean, obviously they had a bond market, it was a sovereign market. The corporate bond market was not meaningful.

It's kind of been realized that this is at the very least a good adjunct to your banking system, but actually might be even superior.

And I think it's going to move very slowly, but I feel for the first time across political sort of sides, across different countries, there is general broad agreement on the direction of travel. And, you know, it's a bit like a supertanker. It's like a fleet of supertankers.

It's going to take a while to get where you want them to go, but they're going there now. So I'm actually more optimistic on the direction, if not the speed, than I've been for a very long time.

I think maybe this is a good point.

We can actually talk more about the modern bond market and which really, where Europe is involved with the kind of birth of what's called, often confusingly, the Euro bond market. Can you. Since that really. I think you do point to that as the beginning of the modern bond market.

Can you kind of just walk us through what happened there, why they're called Euro bonds and why it's so important for financial centers to have good restaurants?

Yes. So these are kind of the original Eurobonds. So after World War II, I mean, Europe was in tatters.

I think we almost forget it was within living memory of at least our parents. And it's hard to exaggerate how bad things were. And the US In a major way, stepped up to the plate, pumped money through the martial aid.

Eventually the World bank also came playing in. The imf, helped budget the system, the whole Bretton woods system, essentially.

So Europe did recover, but it meant that the US went from being this massive credit nation, every country owed them money, to more and more dollars seeping out into the world. That's a great thing. The dollar was the only currency that was still pegged to gold, and other currencies were pegged to the dollar.

So the dollar was kind of the world's gold. And this is the birth of the American exorbitant privilege.

But the position, the unique position in today's financial system, but it meant lots of dollars floating around the world because other people would use them as currency.

Hilariously, this included Soviet banks in Eastern Europe or certainly sort of communist banks, banks owned by communist states like East Germany and Poland, but also the Soviet Union itself. And they, because they had to buy and sell stuff, they exported banks still do these things even in Communist countries.

So they had all these dollars and they didn't want to keep them in the US they kept them in Europe. And there's a bank in, in Paris called B, said Bon Commercial is near east or something.

I wrote something like that bsan and it had a lot of the Soviet Union's overseas dollars and it had the wire address Eurobank. So whenever it wide money to somebody who say Eurobank. So these dollars, offshore dollars, were just called euro dollars.

So offshore currencies are generally always called euro dollars, even if they're not actually euros or dollars or whatever. But you suddenly saw a huge pool with this. American companies were exporting and selling abroad.

They didn't always necessarily want to repatriate it to the US So you have all these dollars started hoard up elsewhere and people realize, well, this seems like an opportunity for a banker.

And at the time, because London had been shattered by the war, the city of London, Europe in general, you'd see European companies and European states and European cities go to the US to borrow because the US was the only game in town. So that's the birth of the truth.

And the Yankee market, I guess we'd call it now that foreign companies issuing dollar bonds in the U.S. the U.S. investment investors. But as Europe improved and ameliorated, European investors were buying stuff, especially in Switzerland for example.

And you had this perverse situation where European companies would go to the US to borrow from European investors. A lot of bankers, particularly in London, thought this was a travesty. So they decided to use those euro dollars to create the euro bond market.

And it's just euro bonds and it's not necessarily European. Lots of countries around the world issue. It's basically the bond market at its most borderless and international.

And it kind of harnessed all those dormant pools of euro dollars that were kind of pooling around in bank accounts around the world and recreated I guess what Nathan Meyer Rothschild originally created a bond market. And it was essential to rebuilding London as a financial center for the world.

From the 60s onwards, people would think of equities and stocks and the uk. There's almost legends about the big bang, the reforms that came under Margaret Thatcher. But the city's renaissance had started long before then.

And it was built on the back of bonds as it had been in the 19th century as well.

And then I guess this became successful that enough that you know, US companies started selling them as well.

Well, yes, because I mean there was so much money abroad. Because also they don't forget in the US I mean you could almost write an entire book just on Regulation Q. Do you remember Regulation Q?

I do, yeah, exactly.

They restricted what savings and loans could restricted the interest rates they could pay. Is that right?

Yeah. So deposit accounts this plain window weren't supposed to pay any interest and saving accounts were capped and they were set by government.

And this was born in the Great Depression. And I think it made perfect sense then in the rebuilding of the World War. You don't want too much money hoarding.

So it kind of is one of those things that makes perfect sense at the time.

But over time it increasingly becomes perverse and silly and it kind of obviously repelled and forced a lot of encouraged people to keep money offshore because you could put the money into a Eurodollar account at HSBC or BNP Paribas Deutsche bank and make more than you could at JP Morgan. The US also had started swung from a massive current account surplus to a deficit. So the US was actually quite keen to keep dollars overseas as well.

They encouraged this because it helped, helped keep the at least protect some value of the dollar as it was losing its value.

But essentially USM companies eventually as well decided, well, you have this hugely vibrant dollar bond market and it's offshore, but we don't care where we borrow money. We have operations abroad as well. So they started tapping it.

Eventually developing countries started tapping it and it just became so old time is still call it the Eurobond market, but it is essentially the external bond markets, the big bad international bond market that is truly stateless. It is not just in London, it's everywhere. And it is, I mean, tens of trillions of dollars worth. It's hugely vibrant and fascinating.

And you've got countries like the Vatican, Papua New Guinea, Russia though they're shut out now. The Church of England issued dollar bonds. It's frankly wildly vibrant and impressive.

Yeah.

And I guess the other aspect that I really appreciated about your book, I mean these are historical stories, but there's also a lot of great individual characters in there and maybe we could talk about a couple of those. To me, the most interesting is Michael Milken.

And partly because, you know, I wouldn't say he's forgotten exactly, but I mean, I think for people, certainly my generation, we haven't forgotten him, but I think the younger generation, they really don't know who he is and how influential he was in creating, in helping create aspects of the modern barn market. So I was wondering maybe if we could just not bring him back to life because he's still alive.

But I mean, let's talk a little bit about his role in the modern bond market. Can you tell us about his, his kind of original inspiration that he had at UC Berkeley and how that kind of set him off on his career?

Yeah, I mean he's one of my favorites as well. He did not talk to me for the book. He refused to talk. But all the people are still alive and living.

He's probably one of the people I would most have liked to talk to just because he is I think genuinely more fascinating and complex than maybe even the people I know him appreciate. Certainly even before me, he's just a very interesting guy. So yeah, he was at Berkeley and he's switched to business studies and he was very brainy.

I mean this is a guy that I heard from other students that they didn't want to take his classes because they graded on the curve and you just know you're not going to get top grade. When he was in there, he was like the teachers would ask him questions, he was that smart.

But at Berkeley stumbled over a book by a guy called Braddock Hickman who was then a little known academic who actually would go on to lead one of the regional feds.

The credit ratings, the higher the rating, the less chance of defaults and lowly rated credits.

Corporate bonds did default more but and this was the sensational bit, the returns on those badly rated bonds were so much higher that even though they defaulted in greater numbers, your returns were vastly better. Better in junk bonds. And you obviously couched it in very sort of academic language. It's very, I've read that paper.

It is not gripping, it's really interesting. It's really good data work at a time when frankly don't forget this kind of not quite pre computers but I don't think he had access to a computer.

So it's impressive work but it is not written grippingly. But Mike Milken as a student immediately grasped it and that kind of became the zeitgeist like or his the whole thing that guided through life.

They're like companies are unfairly rated not because like they don't default, but they just are paid too much. They are shut out of markets. This is unfair.

People should be lending more to these companies because you make more returns, but also you can open up access to capital to all sorts of companies. That might look bad, and some of them are bad and some of them will default.

But broadly speaking, if you have a broad enough diversified basket, you'll make out like a banter it. And that was the cornerstone realization of what became a pretty incredible junk bond empire.

Yeah, and you say, I mean the stories about Milken are really good.

I mean, you say he had this five hour commute from Philadelphia to New York and he hired a guy to sit next to him so that no one would talk to him so that he could spend his time studying the bond market. I really appreciated that one. But his rise was quite extraordinary.

I mean, Drexel's where he worked, their high yield department at one point had four times the capital of Goldman Sachs. According to you and Milken, again, I think you say earned 550 million in.

1986 When that was real money.

Yeah, I mean even Elon Musk would struggle to get that kind of, of paycheck now. But what I thought was interesting about the Milken example was he goes on to basically create the modern junk bond market.

And he does this based on what you just described is under observation that high yield bonds default or the return on a high yield bonds more than compensates for the default risk. But that original paper was written really looking at companies that were so called fallen angels.

In other words, they were companies that issued bonds when they were in stronger conditions and then they became lowly rated. And what Milken did was create an original issue junk bond market.

So people were coming to market with junk bonds as opposed to having bond that, you know, that had started off high yield, high, highly rated and became junk bonds. So could you just tell us a little bit about that?

Because it's a great example, I think of people studying the market, acting on it and then changing the very thing that they've studied.

Yeah, no, I mean, I think this is also what's unique about him in that, you know, let's say that original Braddock Hickman paper, let's say if a million people had read it, and that's a million people have not read that paper, but let's say 100 people would have understood and grasped the implications. 99 Of them would have just used it to buy junk bonds. Just use it as a great investment strategy, it would have made lots of money and that's great.

And probably wouldn't known as great investments. Really all they did was systematically buy junky bonds and harvest that return premium that you'd get.

The hundredth person was Mike Milken and he decided to build something. Like he decided to transform it and in the process change its nature.

Because I mean, one of the almost original sins I see in financial economics or in finance all the time is that people treat it as if it's science. Like If I do 100 physical experiments, you're going to get 100 same results. In finance, the market is adaptive, it's dynamic, it changes.

And as somebody discovers something, it generally gets kind of whittled out.

And junk bonds, because Mike Milken had studied a period when it was primarily companies like you say, hubby investment graded mid downgraded and a few corporate raiders, that first generation of corporate raiders had issued paper that was, you know, rather pejoratively into, you know, if it equals a Chinese paper at the time. And you know, he decided to make it, yeah, a new issue market.

But of course I think that the first iterations, the first vintages of this market were generally the better companies and the better raiders because he kind of built this entire machinery. He seeded funds. I mean he created not just, I mean the, I mean the whole industry. Industry. He's the father of it all.

The whole leverage finance industry, even today's private credit, like that's his grandchild and he built the whole thing. But of course, you know, as they found more and more and some of these raiders, you go like some of those were in print.

Like a. Carl Icahn is an impressive guy and lots of his stuff didn't work out. But like he's, he's smart. Not all of those raiders were actually very good. And they were just as wasteful as the corporate CEOs that they replaced.

So they were supposedly making corporate America leaner and meaner, but in practice they were just kind of propagating some of the same issues. So you can see some of the later vintages of junk defaulted in very high numbers. The returns were not great because that market had evolved.

A lot of companies that normally would have been shut out completely had been able to issue.

A lot of companies were rightly shut out of the market, were able to issue, thanks to Drexel Burnham Lambert's machinery, this bank where Mike Milken worked. And I think still to this day there is a risk premium in high yield. It's more volatile.

It kind of sits between cred like corporate bonds, IG corporate bonds and the equity space. But there is still a premium there. But it waxes and wanes a lot. And it's never been as big as it was when Hickman looked at it.

Yeah, thanks for that, man.

I thought that was just such a great example of, I don't know, you call maybe the Soros reflexivity of market right, the individuals changing the fundamentals.

I know we're kind of coming down to the end here and I wanted to loop back on this notion of bonds as technology that we've seen these big advances in the use of bonds and their power be linked to the way in which they're structured. And you talk about other technologies that have become very important.

Securitization, turning pools of loans into a tradable bond tranching, allowing those pools to be sliced up and structured as cash flows. We know that played both those things, played a big role in the global financial crisis. I wanted to ask two questions.

One is where do you see fixed income ETFs on that kind of technology spectrum, number one.

And number two, are there technologies, you know, coming down the pipe that maybe our people are experimenting with or that, you know, we should be kind of keeping our eye on that would have the potential to change the bond market further in the, in the future?

Well, if I do the second question first, I still think it's probably a little bit overhyped in certain circles, but some of my smarter contacts are getting quite excited about tokenization or fixed income markets. So we've already seen it in repo. I mean, repo is a fast paced market that kind of underpins everything.

I always call it the dark matter of finance because it kind of binds everything together even though you can't see it there. The volumes in tokenized repo, there have been some experts, they're actually growing.

And so just for listeners who aren't aware, how would you describe tokenization of bond markets?

Say, well, essentially sort of slicing individual bonds into and trading over distributed ledger. So it's of simultaneous real time trading on a transparent blockchain of some kind.

And then you can, you know, the issue with bonds, you can trade it in all sorts of different prices and you know, some of them can be quite tricky to trade. But if you tokenize everything and essentially turn into like small tradable units, it should make liquidity better.

It should make trading easier, more efficient.

You don't have to of T +3 settlement days like if I buy a bond, if I buy muni bond, I think quite often you still have to wait 30 days until you actually kind of hit the account. It's just some parts of the bond market are still very much stuck in the 20th century. But I'm not an expert on tokenization.

But it's One of those areas I've started to think I should pay a bit more attention to and think about the implications because if it does look make fixed income a bit more equity like as well and the speed and efficiency that has implications for how like literally the, the nature of the market changes it evolves. And that actually leads to the second issue which is a subject close to my heart.

I've written an entire book on the history of, of index funds and ETFs and I, I would say I for a very long time not underestimate I I always thought passive would have another sort of similar arc in fixed income as it has had in equities that I've been so sure about for a long time.

I've written lots about for the FT and in my book but what I had underappreciated is how specifically the technology of the ETF for want of a better word but the creation, redemption process kind of how that kind of structure operates is both probably arguably better for less liquid markets like the fixed income markets which I, you know there's always been this worry about the, the combination of less traded underlying securities and a highly tradable equity wrapper that they would collide in ways that are bad.

And I've actually gone from sharing a general oh this I'm sure this will end badly at some point or there will be something bad that happens to actually think the ETF might be in a better wrapper at least for many investors in fixed income markets.

And also I'd radically underestimate how much that technology is kind of almost unlocked or sped up or interacted in interesting ways with other fixed income trends like the electronification of bond markets. So more is being traded electronically. The old days we did everything by the phone.

It's kind of of they're definitely dying in things like treasury which have been very electronic for a while but also credit is becoming more electronic.

Then you have the rise of portfolio trading where you can trade big blocks of bonds like massive lines of QIPs, you know, tens, hundreds, even thousands of bonds.

Sometimes the ETF is perfect for that because you can sort of if it looks a little bit like one of the ETFs you can very easy to strip out a portfolio from that or create a portfolio from an ETF share. And then there's systematic trading. I know lots of stat arb hedge fund types in the hedge fund space at quants.

It's kind of one of my first loves as a financial journalist.

I think it's fascinating and there's been talk for at least 10, 15 years that fixed income will have the same quant revolution that happened in equity markets. And it hasn't really materialized to the same extent. But I think the ETF, because of it kind of the ETFs makes a lot of bonds more liquid.

More liquid bonds leads to more trading, more trading leads to narrow bid ask spreads.

It kind of starts like, it's like, I know I'm going to sound like a McKinsey consultant here, but it's like a flywheel where it's all, it's all helping each other. And the crucial change was the etf.

And the etf, contrary to what people, including me, fear that it would cause an accident and would, would be bad for the liquidity of the bond market. Remember, for a long time we worried about the liquidity of the bond market.

The tradability of it was dying in the wake of the reforms of the financial crisis. In fact, the etf, I'd argue, has helped save the bond market.

It has helped make large parts of the credit markets especially far more liquid than they've ever been before. And it has other unintended consequences.

Like if you're not in an index, if you are issuing a bond that doesn't plausibly fit into one of the major indices that is used by one of the major ETFs, then you're kind of a bit of an ugly stepchild. The liquidity is pools, right? It centers around something.

But I think the etf, and there is not a chapter in my book about this, I mentioned this, but I've written a lot about it for the Financial Times, but I think is genuinely one of the more interesting trends to watch over the next five years is the, the ecosystem shift in fixed income, especially credit, which has been slightly more archaic and how ETFs are actually speeding that up. And I'm sure we will have accents at some point, but that's been fascinating to watch.

Yeah, I completely agree. And it's had the effect of making a lot of different bonds more money. Like, you know, and, you know, the. No, we won't, we won't go.

That's a different rabbit hole. But yeah, I love rabbit holes though, Kevin.

Rabbit holes are the best. My life is a whole rabbit hole, basically. Like I wrote a book about my last rabbit hole.

Well, let's, let's maybe wrap up. I can't let you off the hook without asking you about what's currently going on in the bond market.

You've just written an excellent piece on the, I don't know, the dependence of the US bond market on hedge funds now.

And that relates to hedge funds increasing their footprint, their owning of treasury bonds as part of a variety of arbitrage strategies, the most important of which is the so called basis trade where they go long the physical bonds and they short the futures trying to, and they lever up the difference in price between those two things. So as part of that they are big buyers of treasury bonds.

And the book that I write and talk about, that I wrote and I talk about is the rise of carry. And that trade is essentially a carry trade.

It has all the characteristics of carry, it's highly levered, it's liquidity providing and it tends to do poorly in periods of high volatility. So it's short volatility.

So my thesis, or not really my thesis, but a thesis that people have put out there, is that what Bessant is trying to do with these buybacks is to kind of cap the volatility on the bond market and therefore kind of make it safer for these basis traders to continue buying treasury bonds. And I think the evidence for that is we don't really have enough data, I think to say conclusively.

But what do you think, what do you think is the idea, the motivation behind what Besant has been doing with the buybacks?

Well, I've thought a lot about this and obviously I don't know when this is going out, but I feel very confident in saying that whatever this pod goes out, he will not succeed. The buybacks, increasing those buybacks, Even if he 10x's it, it's like peeing on a forest fire. It is not going to have a meaningful impact.

And the bond market has sussed that out very quickly after the initial shock. There are other levers he can do, but fundamentally every dollar the US treasury spends is a dollar they have to borrow.

They're just switching $1 for another dollar of debt.

And you can change the maturity structure and issue lots of treasury bills to pay for long dated buybacks, but again, give them the scale of what the US Government is borrowing. It's not going to materially change. Nothing's going to help. I do agree that he wanted to bring Back that low end and make of dampen down volatility.

But what I just don't get is that the volatility was not high. There was a bit of a sell off.

There are already signs of weakness in some of the weaker players in that trade because there's so much money tied up in that.

So then they kind of, Trump famously said the bond market was getting yippee and they put a pause, took a timeout on the, on the tariffs until things calmed down again. But this was not a fantastically volatile era. It was just like inflation.

People were pricing and inflation was probably going to stay a little bit more elevated for a bit longer. And the Federal Reserve looks under new management and the chairmanship of Kevin Ward less inclined to raise interest rates.

So this is a credibility issue. So you can see the term premium was going up, inflation breaking, it wasn't changing that much.

But the simplest solution is just for Kevin Walsh to say that he's up for interest rate increases and you'll see that calm down. So it feels like, you know, it's like that old ad age, I can't remember what, where it's from, but it's like we must do something. This is something.

Ergo we do this and it doesn't really work. So they felt they had to do something. Affordability is an issue. 30 Year mortgages were getting more expensive. We must do something. This is something.

Well, actually just makes you seem incoherent and desperate, but it's something at least. So I struggle to see the rationale beyond. Bessant knows all this, I'm sure, I'm sure he knows this was not going to work.

I think he just did it because the boss man wanted him to do something. And this was something. And it's going to be interesting to see how they evolve and how they do this.

But fundamentally, if inflation is going to stay higher for longer and we still, I mean it's been quite a while since and this isn't just under Walsh or Trump, of course, but inflation has been above the Federal Reserve's target for quite a while now and they've talked about the difficulty of that last mile. Well, I think the Federal Reserve now needs to walk it.

And if that walk falls on Kevin Walsh, and that is awkward for him in his position and he's probably promised Trump that he doesn't want to raise interest rates. I think they should just sell it as if Trump wants lower 30 year mortgage rates. This is the easiest way of doing it.

That really, if you're raising interest rate, it doesn't really matter that much, but you are essentially making mortgages more affordable and maybe that's what they do. We'll see in the coming weeks and months.

Yeah, it'll be fascinating. I'm not optimistic that they'll be able to walk that last mile, but as you say, we'll see. Well, listen, Robin, that's a good place to wrap up.

We really appreciate you taking the time. It's a fascinating book and we wish you all the best with the launch.

No thanks, Kevin. I really appreciate that. And yeah, I love being here and I've been looking forward to it.

Excellent. Excellent. Well, we appreciate that. Okay, the book is called A Fabulous the Epic Story of How Bonds Built the Modern world.

It's out September 29th 9th and make sure to get a copy. As always, what we've talked today really is just a tiny fraction of what you're going to learn from the book.

It's really worthwhile, it's fun, and I recommend it. So that's it for today for all of us here at Top Traders Unplugged. Thanks for listening and we'll see you next time.

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