Intro

In this episode of Excess Returns, we speak with Nancy Davis, founder and CIO of Quadratic Capital Management and the mind behind the innovative fixed income ETFs IVOL and BNDD. Nancy shares her insights on how investors are unknowingly short volatility in their portfolios, the role of options and convexity in fixed income, and how her ETFs seek to hedge against inflation, interest rate shifts, and volatility in a unique way. We also discuss the bond market, inflation dynamics, and how investors can better understand and manage risks that are often hidden inside traditional portfolios.

Main topics covered
• How Nancy’s experience trading volatility at Goldman Sachs shaped her investment philosophy
• Why most investors are short volatility without realizing it
• Understanding convexity and prepayment risk in bond portfolios
• The rise of passive investing and its impact on interest rate volatility
• How IVOL provides exposure to interest rate volatility and inflation protection
• The problem with relying on CPI as a measure of inflation
• Why gold is an inconsistent inflation hedge
• The yield curve as an alternative indicator of inflation expectations
• Why interest rate volatility is historically cheap today
• The relationship between bond volatility and stock volatility
• How to think about IVOL and BNDD in a diversified portfolio
• The long-term risks of shorting volatility and selling options for “income”

Timestamps
00:00 Introduction and overview of option selling in markets
02:15 Nancy’s background at Goldman Sachs and lessons on volatility
05:00 Understanding convexity and its importance in fixed income
06:30 Why investors are short interest rate volatility without knowing it
10:25 The hidden risks inside the bond market and the role of mortgages
11:00 Why most investors are short inflation in real life
13:00 Conventional vs. alternative inflation hedges
17:00 Why CPI is an imperfect inflation measure
18:00 How the yield curve reflects inflation expectations
21:00 Historical yield curve data and current inversion
25:00 Interest rate volatility after Silicon Valley Bank
26:30 Relationship between bond and stock volatility
28:00 Using IVOL in a portfolio
31:00 Discussion on the national debt and interest rate risk
32:00 BNDD ETF and how it complements IVOL
33:30 Why inflation-protected bonds are underused in the US
36:00 Closing questions – what Nancy believes most peers disagree with
37:00 Why selling options is not income and the risks investors overlook