Macro Hive Conversations With Bilal Hafeez Ep. 208: David Dredge on Inflation, Underpriced Risks and Sharpe Ratio Flaws
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Mar 22, 2024 
The podcast discusses the BoJ's timid hike, fiscal dominance in bond buying, central banks' shifting views on inflation, and strategies for risk management in volatile markets. David Dredge, CIO of Convex Strategies, shares insights on portfolio positioning, utilizing convexity for risk mitigation, navigating market volatility, and recommended books for understanding economics.
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Delayed Tightening
- Central banks initially underestimated the persistence of inflation and the need for aggressive rate hikes.
- This delay led to negative real rates and a need for rapid tightening to catch up.
Systemic Risk in Fixed Income
- Systemic risk lies in the massive, uncapitalized fixed income holdings within the financial system.
- These holdings, treated as zero risk-weighted assets, create instability due to accumulating unrealized losses.
The Long-End Paradox
- Central banks are incentivized to keep long-end bond yields anchored to protect financial institutions holding large bond positions.
- This creates a paradox of hiking short-term rates while maintaining loose financial conditions overall.