Convexity Maven Harley Bassman joins MacroVoices to discuss why traders who understand convexity are being rewarded. They also delve into topics such as inflation, bond market risks, Simplify Asset Management's new product, crude oil market developments, market trends, and the Fed's impact.
Investors can benefit from focusing on convexity-based trades in the current market.
Inflation is inevitable due to increasing debt and limited options to manage it, and investors should seek investments with positive convexity.
Simplify Asset Management's innovative use of derivatives in ETFs offers higher yields without increasing risk.
Deep dives
The Opportunity in Convexity-Based Trades
Harley Bassman, known as the Convexity Maven, discusses the advantages of convexity-based trades in the current market. He highlights the imbalance between the risks and rewards of duration, credit, and convexity, and suggests that investors should focus on taking advantage of the overpriced volatility in interest rates. Bassman also explains how his strategy involves buying newly issued mortgage bonds with higher coupons to capture embedded optionality and generate better returns.
The Case for Secular Inflation
Bassman argues that inflation is inevitable due to the economic landscape of increasing debt and the Federal Reserve's limited options to manage it. He explains that protecting the majority of people from inflationary effects is more important than trying to control unemployment. Bassman suggests that investors should consider investments that offer positive convexity, like newly issued mortgage bonds, which have higher coupons and better potential returns.
Simplify Asset Management's Clever Use of Derivatives in ETFs
Bassman discusses Simplify Asset Management's approach to creating innovative ETF products by leveraging derivatives. He explains that by using derivatives in their ETFs, Simplify can offer higher yields without increasing risk. Bassman highlights the success of their strategy involving a seven-year put option on Treasury futures and teases a new ETF product that focuses on investing in newly issued mortgage bonds to capture embedded optionality.
Opportunity in Mortgage Bonds and Callable Munis
The current yield curve suggests that rates will be lower in the future, creating opportunities in mortgage bonds and callable munis. The inverted curve has caused mortgage bonds to trade at 175 basis points over treasuries, presenting a compelling investment opportunity. By taking advantage of the shape of the curve, investors can potentially make money in these securities as the curve steepens out.
Cheap S&P 500 Hedges and Dollar Index
S&P 500 hedges are currently cheap, despite concerns about the market being frothy. The cost of out of the money puts on the S&P 500 is low due to the inversion of the yield curve, making the options out of the money according to the model. Additionally, the dollar index is in a wait and see mode, with the potential for an upside breakout. Gold, on the other hand, is facing critical support at 1926, and a deeper correction is possible if it fails to hold. Overall, the charts suggest that hedges and hedges are cheap, while gold may experience short-term weakness.
MacroVoices Erik Townsend and Patrick Ceresna welcome Convexity Maven Harley Bassman to the show. Harley says why take credit risk when the market is paying traders who understand convexity more handsomely. They also discuss inflation and the other usual macro suspects. https://bit.ly/3ZeEsmF
