PODCAST:Odd Lots
TITLE:Harley Bassman on Why the Big Moves in the Bond Market Are Done
DATE:2024-01-11 00:00:00
URL:
MODEL:gpt-4-gizmo
In this episode of "Odd Lots," hosts Tracy Alloway and Joe Weisenthal discuss the bond market with Harley Bassman, Managing Partner at Simplify Asset Management and the creator of the MOVE Index. Bassman is known for his expertise in fixed income and derivatives, particularly in the realm of convexity.
Bassman begins by explaining the concept of convexity in simple terms as unbalanced leverage, or asymmetry in financial payoffs. He highlights the importance of understanding how payoff profiles work and their impact on investment decisions.
The discussion then shifts to the bond market, where Bassman outlines three primary risks: duration (the timing of cash flow returns), credit (the risk of default), and convexity (the path of returns). He argues that selling convexity in the current bond market is a favorable strategy. He also notes the current unusual situation in the bond market, where long-term bonds offer lower returns compared to shorter-term bonds, a scenario often referred to as an "inverted yield curve."
Bassman also delves into mortgage bonds, explaining their value proposition in the current market. He describes these bonds as akin to a covered call option on a 10-year Treasury bond. He believes that near-par mortgage bonds (those trading close to their face value) offer a particularly attractive investment opportunity, especially given their relative safety and higher yield compared to corporate bonds.
Regarding the Federal Reserve and interest rates, Bassman shares his view that the Fed will likely maintain higher interest rates for longer than the market anticipates, to ensure inflation is firmly under control. He suspects that the Fed's actions will be driven partly by Chairman Jerome Powell's concern for his legacy and the desire not to be remembered as a central banker who allowed inflation to spiral out of control.
On the topic of the correlation between stocks and bonds, Bassman notes that historically, when inflation and interest rates are low, stocks and bonds tend to move inversely. However, when inflation and rates are higher, they move in tandem. He anticipates that this correlated movement will continue until rates and inflation come down.
The conversation also covers zero-day options in the stock market and their impact on market volatility, the psychology of Federal Reserve decision-making, and the potential for mortgage rates to decrease further.
Bassman concludes by discussing his work with Simplify Asset Management, where he has developed ETFs (Exchange Traded Funds) that allow retail investors to access complex fixed-income trades. He mentions specific ETFs that he believes are well-positioned in the current market environment.
Overall, the episode provides in-depth insights into the fixed income market, highlighting the complexities and opportunities within this segment of finance.
