Harley Bassman, The Convexity Maven

PodcastAlpha ExchangeHarley BassmanOct 6

Bassman links elevated rates to the U.S. fiscal outlook and argues that persistent deficits, rising interest costs, and doubts about fiscal control pose long-term risks. He discusses inflation measurement, the limits of monetary and political responses, and how household costs and housing affordability shape the economic picture. In markets, he focuses on bond supply, volatility measures, passive equity flows, and possible trades, while warning that some outcomes—including a dollar decline and a reversal in equity inflows—remain uncertain.

Interest Rates Government Debt Inflation Fixed Income Market Volatility Fiscal Policy

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Key Takeaways

Bassman warns that the federal government’s roughly $5 trillion in income falls short of $7 trillion in expenses, with $1.1–$1.2 trillion in interest costs that could reach $2 trillion as low-coupon debt rolls over. He says continued $2 trillion annual deficits without controls could eventually create a debt spiral, though he cautions that it could take 20 years and says not to short the market yet.

Bassman argues that rising rates reflect eroding trust in U.S. institutions and fiscal policy, while the roughly $2 trillion deficit and new borrowing by both the government and hyperscalers add to the pressure on long-term yields. He estimates five hyperscalers will issue $750 billion in debt alongside roughly $2 trillion of new government borrowing, competing with Treasuries for buyers.

Bassman says inflation may serve as a politically convenient, indirect tax if growth does not resolve the fiscal problem, while arguing that CPI methodology may understate inflation and keep benefit increases lower. He cites TIPS breakeven inflation near 2.35% for four years and core inflation in the 2%-and-change range, while core PCE has remained above target for 65 months; a cited timeline for returning to 2% is the end of 2028, but he emphasizes its uncertainty.

Bassman links housing affordability pressures to both higher borrowing costs and long-running cost increases: housing, health care, and college costs rose four to five times over roughly 30–40 years, while MBA starting salaries only doubled. He says the housing affordability index has fallen well below 100, higher rates reduce the number of people who can afford a median-priced home, and housing represents 18% of the economy.

ECONOMY

Debt-Service Burden — Bassman cites $5 trillion in federal income against $7 trillion in expenses, with current interest costs of roughly $1.1–$1.2 trillion. He warns that interest could reach $2 trillion as low-coupon debt rolls over, exceeding defense spending, and calls that outcome unsustainable.

“It is a 95% fiscal problem. We got 5,000,000,000,000 of income and 7,000,000,000,000 of expenses. Interest is now 1.1, 1 point 2,000,000,000,000.”—

Fiscal Trust — Bassman argues that rising rates reflect a lack of trust in U.S. institutions and fiscal policy, not primarily an inflation problem. He cites a $2 trillion deficit and an unprecedented 6% fiscal deficit outside war or recession. An agreed path to fiscal control, he says, could reduce risk.

“We have a trust problem. We don't trust the government. We don't trust our institutions. Fed, we kind of trust maybe…”—

Inflation Measures — Bassman says TIPS breakeven inflation has hovered around 2.35% for four years, while core inflation is in the 2%-and-change range. He suggests CPI methodology may understate inflation and says keeping CPI low restrains Social Security and other benefits linked to it.

“Nonetheless, it's been hovering at two thirty five breakeven rate for the last four years…”—

MARKETS

Hyperscaler Debt — Bassman estimates that five hyperscalers will issue $750 billion in debt, alongside roughly $2 trillion of new government borrowing. Buyers of hyperscaler bonds are not buying Treasuries, he says, adding supply pressure and contributing to pressure on 10- and 30-year rates.

“I mean, we're gonna issue like 4,000,000,000,000 of debt as we kind of roll over the stuff, but 2,000,000,000,000 of new debt. Hyperscaler estimates the five big companies is $750,000,000,000…”—

Gold Weakness — Bassman attributes gold's current weakness partly to rising rates and possible forced selling by investors facing margin calls. He notes that gold remains well above its level two years earlier.

“Gold's going down right now. Why is that? Well, one, rates are going up…”—

Two-Year Treasuries — Bassman calls two-year U.S. Treasuries probably the best trade in the market, citing yields up to 5%, little duration risk, and state and local tax-free income. This is his investment view.

“The best trade in the market right now is probably two year US treasuries Up to 5%, you can't cry about that. You have almost no duration risk…”—

FORECASTS

Dollar Depreciation — Bassman says the U.S. dollar could eventually follow Japan's path of depreciation as an escape valve for high debt, while acknowledging uncertainty about the comparison and what the dollar would weaken against. He cites Japan's currency move from 80 to 160.

“The currency has gone from 80 to 160. That's what's possible, right? That's the escape valve. The US dollar will go down the same path, I suppose, at some point…”—

Rates May Overshoot — Bassman says a 5% 10-year yield is not historically unusual, but rates may overshoot after returning to that level. He cites MOVE's 1990s average of 100 and his historical rule of thumb to buy at 80 and sell at 120.

“A 5% tenure is basically where we've always been. So it has not been a blowout…”—

Bassman’s Fiscal Trust Problem

Bassman argues that rising yields reflect eroding confidence in U.S. fiscal control and the dollar more than accelerating inflation, while persistent deficits leave inflation as a likely path forward.

CPI and Household Costs

Bassman questions whether CPI captures lived inflation and says widening gaps between average and median incomes, alongside soaring housing, healthcare, and education costs, are worsening household strain.

Deficits and Interest Costs

Bassman says the deficit and rising interest burden are unsustainable, arguing that markets need a credible long-term fiscal plan to restore trust and reduce risk.

Fed Guidance and Fiscal Credibility

Bassman dismisses short-lived bond-buyback efforts, warns that forward guidance can encourage excessive risk-taking, and says policymakers need credible plans rather than market-support gestures.

Rate-Sensitive and Insensitive Borrowers

Bassman argues that private credit and hyperscaler borrowing blunt the Fed’s influence, while heavy Treasury issuance and weaker foreign demand add pressure to longer-term yields.

Treasury Supply and Real Yields

Bassman attributes higher long-term yields mainly to supply and says TIPS offer attractive real returns if CPI is a reliable inflation measure, while noting that this assumption is uncertain.

Fed Constraints and Housing

Bassman says the Fed faces a dilemma: higher rates further damage housing affordability and government finances, while lower rates could revive inflation fears and weaken the dollar.

Policy Rates and Fiscal Choices

Bassman favors short-term Treasuries at current yields, questions how much rate moves restrain activity, and argues that political incentives make spending restraint and tax increases difficult.

MOVE Index Explained

Bassman explains the MOVE index as an implied measure of Treasury volatility, outlines its construction, and describes using implied volatility to assess options trades.

Bond Volatility Through Cycles

Bassman says a MOVE reading near 100 is historically ordinary rather than extreme, noting that markets tend to overshoot and that fear often prevents investors from trading volatility effectively.

Passive Equity Flows

Bassman argues that steady retirement contributions and passive investing, rather than valuation alone, support equity prices, and says rising unemployment could reverse those inflows.

Rates and Options Trades

Bassman explains how forward rates reveal breakeven levels, says current rate and volatility curves offer few obvious opportunities, and describes out-of-the-money S&P puts as a potential hedge.

Rate Shocks and Curve Steepening

Bassman doubts that higher borrowing costs will quickly curb government or hyperscaler demand, but expects a severe equity selloff to pull front-end yields lower and steepen the curve.