Odd Lots Harley Bassman on Why the Big Moves in the Bond Market Are Done
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Jan 11, 2024 
In this engaging discussion, Harley Bassman, the Convexity Maven and managing partner at Simplify Asset Management, shares insights into the bond market's recent volatility and its future outlook. He believes that as the Federal Reserve approaches its 2% inflation target, we can expect a normalization and steepening of the yield curve. Bassman also reveals his favorite trades for 2024, reflects on Jerome Powell's legacy, and even shares his unique approach to selecting chart colors, blending finance with personality.
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Convexity Explained
- Convexity in the bond market simply represents unbalanced leverage.
- It describes a non-linear payoff structure where gains and losses are unequal for equal price movements.
Bond Market's Three Risks
- Bond investors manage three key risks: duration (when money returns), credit (if money returns), and convexity (how money returns).
- Currently, selling convexity offers the best risk-return opportunity in the bond market.
Shorting Convexity
- Shorting convexity involves selling options, akin to selling covered calls on a stock portfolio.
- This strategy converts potential capital gains into current income while limiting upside potential.