Harley Bassman on Why the Big Moves in the Bond Market Are Done

Tracy Alloway (0:10)

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

Joe Weisenthal (0:15)

And I'm Joe Weisenthal.

Tracy Alloway (0:16)

Joe, you know what one of the weirdest things about 2023 was? I mean, I guess there's, that's an unfair question, isn't it?

Joe Weisenthal (0:23)

Why don't you just tell me what's on your mind? I could make many guesses, but why don't you just tell me?

Tracy Alloway (0:29)

So after all the drama in the bond market, all the ups and downs, all the volatility, we basically ended the year kind of where we started, right around 3.8% on the 10-year yield. And I know it's picked up a little bit since then, but we basically had this really round trip, but a lot happened in between.

Joe Weisenthal (0:48)

That was a great choice, Tracy, for one of the weird things that happened. Yes, that was a huge story throughout the year, bonds fell off higher rates, et cetera. And then to get to the end of December and say, oh yeah, the 10-year is basically where it started the year, extremely strange and unexpected. And when I saw that stat, I was like, oh, I did not anticipate that at all.

Tracy Alloway (1:08)

Yeah, and to me, maybe this is gonna be a bit of a tortured analogy, but 2023 is sort of emblematic of the bond market overall. People tend to look at it and think it's super boring. Normally, before the wild years of 2021, 2022, 2023, it didn't move around that much.

Bonds were supposed to be boring in that sense. And I think people have this view of like, okay, you buy a 10-year or maybe you buy a tip or something like that, you invest in T-bills to get a little bit of pickup, or maybe you sell some bonds. And that's basically the extent of investing in the bond market. But there's this whole world when it comes to trading fixed income and interest rates that gets really interesting, really complicated in some ways. And I feel like we don't talk about it enough. Like every once in a while it hits the headlines.

Like when Bill Gross was talking about selling volatility before he left Pimco. Everyone was like, oh, wait a second. There's a big bond investor selling volatility. I wonder how they're actually doing that.

But more often than not, we talk about yields. We kind of connect them to what's going on in the macro economy and inflation and maybe the US debt and that's it.

Joe Weisenthal (2:25)

No, you're totally right. I mean, there's really two things. I mean, A, part of the story for bonds over the last two years was the end of this incredible 40-year bond bull market or Treasury bull market. And there were a few interruptions, of course, in 94, et cetera, and we know about that. But by and large, bonds went up, yields went down, and bonds were like a nice hedge against your equity portfolio and 60-40 type portfolios were great. But then the other thing is you say, if you talk to an equity manager, they'll be like, oh, I like tech stocks.

This year, I like energy, some rotation, we like big caps, we like small caps, we like international, but it's like different flavors of being long. Whereas when you look at how a lot of fixed income portfolio managers invest, as you say, it is often various flavors of derivatives around fixed income or spreads and things like that rather than just long here, long there.

Tracy Alloway (3:21)

Exactly. I am very pleased to say that today, we do in fact have the perfect guest to talk about the intricacies of fixed income. We have someone who actually used to work at Pimco. He's now managing partner at Simplify Asset Management, perhaps better known as the Convexity Maven.

So we're going to be speaking to Harley Bassman. Harley, thank you so much for coming on the show.

Harley Bassman (3:45)

Thank you. Good morning.

Tracy Alloway (3:47)

Very excited to have you here. I should have added to your intro that you are also a master of colors, right?

Joe Weisenthal (3:54)

Which we're going to get into. The best color line charts in the business.

Harley Bassman (3:58)

Thank you.

Tracy Alloway (3:58)

So I have a question to begin with, and this is completely out of self-interest. As a journalist who's had to write about convexity at many times during their career and has always struggled to define it in a way that satisfies my editors who want to encapsulate a financial relationship in as few words as possible, how would you describe it?