Harley Bassman on Trump, the Fed, and the Bond Market

Harley Bassman (0:03)

Bloomberg Audio Studios.

Tracy Alloway (0:05)

Podcasts, radio, news. Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:24)

And I'm Joe Weisenthal.

Tracy Alloway (0:26)

Joe, the week's not over.

Joe Weisenthal (0:30)

Yeah, we're recording this November 6th at 10:33 a.m. But one thing that is over is a lot of people expected that at this point, there would be significant ambiguity about who had won the election. And actually, that part is over. There's no ambiguity at all. It's been called.

Tracy Alloway (0:48)

Yeah, that's right. So Trump has obviously won the election, and we've seen a pretty big market reaction. Equity is obviously up, but also bond yields are going up, which means prices are going down. And there's been lots of talk about the return of volatility in the bond market and the way investors or traders were sort of approaching event risk from this election. I wrote about it in the newsletter. There are other people who have been writing about it. And of course, as I said, the week isn't over yet. We still have that Fed meeting on Thursday.

Joe Weisenthal (1:23)

No, that's right. You know, you mentioned the event risk and the stock market rally and the bond move. And I would say two things. I think there is probably just sort of generically probably a view among equity investors that Trump era policies, probably less regulation, lower corporate taxes is good for stocks. That seems like something. On the other hand, it's interesting because the VIX has absolutely collapsed. And so I think part of the reason perhaps for at least some component of this stock market reaction is probably just the end of that election certainty being gone, the unambiguous outcome and setting aside Trump versus Harris policies. Now, on the other hand, what's interesting is the move index, the VIX for rates, that's lower, but not dramatically lower. And it still remains at very high levels, at least relative to recent years or at least over the last year. So there are sort of, I would say, competing forces. Some aspects of uncertainty are gone. That's good. But then, as you say, this sort of march up in rates, which is a global story, by the way, is still a big thing out there.

Tracy Alloway (2:33)

Yes. So we are going to be focusing on bonds today. We might record an equity-specific episode later this week. But because of the upcoming Fed meeting and the election this week, we felt, you know, let's look at bonds first.

Joe Weisenthal (2:47)

Let's look at bonds.

Tracy Alloway (2:48)

All right. And who better to look at bonds than Harley Bassman, managing partner at Simplify Asset Management and the creator of Convexity Maven, which is an awesome publication. If you're not already reading it. Harley, thank you so much for coming back on Odd Lots.

Harley Bassman (3:04)

Thank you very much. Glad you were awake today.

Joe Weisenthal (3:07)

So I was also the creator of the move index, which I meant in addition to the creator. Right. In addition to the creator, in addition to being the Convexity Maven himself. Anyway, keep going, Tracy.

Tracy Alloway (3:17)

Well, OK, why don't we start with the move index then, Harley? Explain or just give us a recap on what's been going on with the move, because there was one specific day where we saw a big move upwards.

Harley Bassman (4:01)

Yesterday, it was at 17 basis points, so the market kind of got it right. And as I look at the screen right now, 10-year rates moved about 18 So market kind of called this thing right on. The move was at 130-ish, it's now at 117-ish. It's going to drop again after the Fed on Thursday, because we still have the uncertainty of what they're going to go do. We kind of think it's locked in, but not for sure. You'll see the move kind of drop down after that. I guess the contrast you're kind of zipping towards is that the VIX at 15-ish now, it never got that high. It got to like 20-ish two days ago, which is barely above its long-term average. Stock market has not moved that much for this entire time. All the volatility has been in rates, the uncertainty of what the Fed's going to go and do.

And that still is not over. We still have to figure out what is the terminal value, the terminal rate the Fed's going to get to, as well as where we're going to be this December, which is very interesting right now. If you look at the market, we've had the market pricing in a lower rate than the dots, the Fed's prediction of policy going forward. That is now flipped over. We now have the market at 40 basis points higher than the Fed's most recent dot plot, and that's kind of new. So the market's kind of changing sentiment here about where we're going to land a December from now and then two years from now.