Market Crises, Convertible Bonds, and Relative Value Trading

Market prices are impacted by a host of forces including changes in the economy, in earnings and in the stance of monetary policy. For Andy Constan, flows carry great import as well. Hitching a ride to Wall Street in 1986 at Salomon Brothers, Andy was part of a group that contributed to the Brady Commission Report, the post-mortem on the calamity that was the ’87 stock market crash. In this context, he shares his views on episodes in which flows into or out of an asset disrupted the equilibrium of supply and demand, leading to shocking movements in price. Among them, Andy describes the April 2020 negative price in front month crude, a short-lived but intense dislocation resulting from mechanical ETF flows. In furthering the discussion on liquidity, we explore the 2010 blow-up in the long dated SPX variance swap market, a trade that Andy ranks among the most attractive he has seen in his career, a result of an extreme imbalance in supply and demand. Our conversation then shifts to the present day of risk and the work that Andy is doing at Damped Spring Advisors, a research firm he founded in 2019. On his mind is the market’s capacity to adjust to a regime of higher rates, the factors that may leave QT more or less impactful and whether Fed policy ultimately leaves money tight or not. I hope you enjoy this episode of the Alpha Exchange, my conversation with Andy Constan.