🔧 Pipe dream

Andy Constan on the nuances of monetary plumbing

Casey Wagner, Ben Strack & Felix Jauvin
February 27, 2025

Here’s what you’ll find in today’s edition:

Felix shares takeaways from his Forward Guidance episode with Andy Constan.
The Senate talks future crypto legislation in the first digital asset hearing of the session.
How a crypto asset manager CEO expects regulatory shifts and a $70 million fundraise to fuel product expansion.

What I learned interviewing Andy Constan

This week I had the pleasure of speaking with Andy Constan, CEO of Damped Spring.

Andy has had a storied career at the likes of Bridgewater and Brevan Howard. He possesses a deep understanding of monetary plumbing and how it translates into a tangible impact on the economy and markets.

As mentioned in my piece last week, the FOMC meeting minutes shed light on the future of the Fed’s balance sheet composition and what it wants to see happen next. There’s a ton of complex nuance involved, so I pulled Andy in to break it all down.

Here are a few takeaways from our discussion:

1. QT 2.0

The Fed is trying to plan out what its balance sheet looks like once QT is done. It appears to be rallying around the idea of trying to match the weighted average maturity (WAM) of the Fed’s balance sheet to the WAM of the Treasury’s debt outstanding.

As it stands, the Fed’s balance sheet sits at approximately eight years in duration, whereas the Treasury is at five. Setting aside the complex math that Andy provided, the key takeaway is that QT, in its spirit, is not as done as it may seem on the surface and the market needs to absorb further duration.

I asked Andy why this was important to do, and he mentioned the following:

“Well, let's just say there was a crisis. In a crisis, bonds rally a lot on the front. Then, say [the Fed] decides to begin QE and let's assume interest rates are zero as it has said pretty clearly they're not going to do more QE until interest rates are zero. We're back in a position where the Fed is buying one and a half percent coupons which — unless the crisis never resolves, it’s going to be underwater on those things and so it would be better, if you're going to be underwater in those things, you'd rather not have a lot of them going into it.”

2. Debt ceiling dynamics

As the debt ceiling continues on, this has a substantial impact on funding markets due to the associated TGA drawdown that comes with it. The FOMC minutes hinted at the idea of pausing QT to avoid any volatility associated with the debt ceiling drama.

Andy’s explanation:

“QT has two aspects: forcing the private sector to take on riskier assets and draining reserves from the financial system. The first didn’t happen as the Fed used runoff and Treasury muted it with bills. The second — reserve drainage — has been the primary driver of QT’s impact.

Pre-QT, the reverse repo (RRP) grew to over $2 trillion, acting similarly to bank reserves. While RRPs provide liquidity, money market funds don’t lend like banks do. Historically, removing reserves tightened lending due to fractional reserve requirements. But today, reserves aren’t necessary for lending.

QT has drained RRPs without yet affecting bank reserves. The key question is whether reserves remain adequate. Treasury spending during a debt ceiling standoff injects reserves, but once resolved, rapid TGA replenishment could drain reserves too fast, risking financial stress.

This volatility is why some suggest pausing QT, though it’s not a consensus view. If debt ceiling issues resolve, QT may continue unchanged. The Fed sees reserves as still abundant, and I estimate it could withdraw another $250-$500 billion, potentially extending QT into 2026. However, my view remains that it’ll stop at ~$3 trillion in reserves.”

3. Bessent’s Treasury issuance

A few weeks ago, I wrote about how the first QRA meeting from the Treasury gave us a line of sight into how Scott Bessent is thinking about Treasury issuance in contrast to his predecessor, Janet Yellen.

Many expected him to attempt to walk back the bills-heavy issuance strategy that Yellen had implemented, but in reality he kept things as-is. This shocked many observers. However, when I asked Andy about this hypocrisy, he explained how the actual proportion of bill issuance could shift due to a change in the size of the fiscal deficit:

“If they keep coupons the same and the deficit rises…well, they have to make it up with bills and so there's more bills and the same amount of coupons that's oversupplying the bills market and undersupplying the coupon market. And so if you're going to keep it constant, the deficit will determine whether you're going to be extending the debt. Meaning, if the deficit falls and you keep it constant, you extend the duration you're terming out the debt. If the deficit rises and you keep coupons constant, you’re relying more on bills.”

Overall, this was one of my favorite interviews of the year. Go check out the full interview and don’t forget your notepad — this one’s a Macro 301 interview.

— Felix Jauvin

DAS NYC is approaching.

VIP passes? Gone. The agenda? Live. The conversations shaping this market are happening — make sure you’re in the room.

Join some of the industry's top leaders:

Stani Kulechov (Avara) – The DeFi architect shaping the next wave of onchain finance.
Robert Leshner (Superstate) – Tokenized assets aren’t theoretical — they’re here.
Alex Thorn (Galaxy Digital) – The research that’s setting institutional strategies.

Less than 30 days to go.

📅 March 18-20 | NYC

This was Nvidia’s fourth quarter revenue, as reported yesterday. Analysts had expected revenue to come in at $38.05 billion for the final months of 2024. The chipmaker also beat on earnings per share, reporting $0.89 vs. $0.84 projections.

Still, shareholders weren’t terribly impressed. NVDA was trading almost 4% lower at 2 pm ET.

The Senate Banking Committee’s Digital Asset Subcommittee held its first hearing yesterday and, unsurprisingly, stablecoins took center stage.

Cynthia Lummis, who chairs the newly minted subcommittee, said that stablecoin legislation is its top priority. A market structure bill, which we started to see movement on last session, will follow.

“We’re on the precipice of finally creating a bipartisan legislative framework for both stablecoins and market structure,” she said.

Former CFTC Chair Timothy Massad, a witness during the hearing, advised lawmakers to zero in on stablecoins. Market structure legislation should be punted until fundamental questions are answered.

“Market structure regulation requires resolving some complex regulatory boundaries, including when is a digital asset a security, a commodity, both or neither?” he said. “There is a risk that we will significantly undermine the securities law framework that has served this country so well and has made our securities markets the envy of the world.”

The comments come as the industry continues to speculate on what a stablecoin bill might look like. Lummis’ GENIUS Act, introduced alongside Democratic Senator Kirsten Gillibrand, stipulates that “payment stablecoins” must come from registered issuers and have 1:1 backing from fiat currency “or other secure reserves.”

Generally speaking, the industry and both parties agree on these general terms, but the details are a bit trickier to iron out. Democrat Mark Warner yesterday said he’s seen “a whole bunch of bad stuff” and is advocating for more robust KYC requirements.

Should the GENIUS bill progress, we are likely to see another hearing with the full Senate Banking Committee.

But the timeline on if and when this may happen remains unknown.

— Casey Wagner

You may have seen one of the biggest crypto asset managers just raise $70 million as part of a push to broaden its offerings.

That would be Bitwise, which seeks expansion as more institutions enter the space and the SEC signals increased open-mindedness.

I caught up with CEO Hunter Horsley, who said the company expects to boost headcount from about 100 to roughly 130 this year. On the product front, it looks to not only bring more ETFs, but a slate of custom solutions.

Bitwise essentially has three investment buckets that it hopes to grow, Horsley explained. Its “beta” offerings are those most people know about (i.e. its crypto index fund, as well as the bitcoin and ether ETFs).

As part of its onchain solutions bucket, the firm offers non-custodial institutional staking via its acquisition of Attestant in November. And finally, there are Bitwise’s so-called alpha strategies.

The latter category involves custom SMAs for large institutional clients, for example.

“There’s a growing interest amongst owners of bitcoin to explore if there are ways to make their holdings productive and generate income or yield with that bitcoin,” Horsley explained.

Bitwise and other fund groups have proposals in front of the SEC to launch ETFs that hold assets beyond BTC and ETH. Feel free to refresh yourself here and here.

Horsley said Bitwise successfully uplisting its Bitwise 10 Crypto Index Fund (if cleared to do so) would mark one of the biggest developments of the year. That ~$1.2 billion trust became the world’s first crypto index fund in 2017.

“A lot of investors are not going to build a portfolio of seven different single-coin ETFs,” he told me. “I think many, as they continue to explore beyond bitcoin, are interested in an index solution.”

Conversations Bitwise has had with the SEC after Trump’s inauguration are “more constructive,” Horsley said, calling the shift “a night-and-day change.”

He declined to speculate on the agency’s possible timeline in approving crypto ETFs beyond those holding BTC and ETH, but noted the SEC’s clear “openness to a broader set of things.”

Finally, I asked about how client conversations might have shifted since bitcoin’s latest plummet.

Horsley noted the vibes from some individuals/traders are “somewhat bearish and maybe a little bit fearful” — particularly those with exposure to small- and mid-cap cryptos.

As for mainstream investment pros, he said: “I think there is more interest, including this week, than ever before.”

After all, Horsley added: “Bitcoin having volatility is not a new phenomenon.”

— Ben Strack

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