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Powell vs. Bond Traders | Option Volatility During Earnings | Mortgage Rate Spread to Treasuries

By Derek Moore

Show Summary:

Derek Moore is back with ZEGA Financial CEO Jay Pestrichelli to discuss whether Jay Powell or bond traders are in charge of interest rate policy? How option volatility changes around earnings announcements. Why the spread between the 30-year Mortgage Rate and 10-year treasuries is historically wide including MBS (Mortgage-Backed Securities) impact. Plus, how MBS are doing something kind of weird right now. Later they discuss financial conditions, how high yield loans and bonds have greatly outperformed “safer” fixed income areas, and the breadth of the market vs the “magnificent 7” companies. 

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 Topics Include:

  • Is the bond market doing the Fed and Jay Powells work for them?
  • How higher interest rates tighten financial conditions.
  • The Fed not buying bonds creating lack of buyers?
  • Typical spread between the 30-year mortgage rate and the rate on US 10-year treasuries
  • How the spread is historically high (like 2 standard deviations)
  • When the 30-year mortgage spread over treasuries widened in the past
  • Does this mean mortgage rates need to come down or treasury rates have more to rise?
  • What are MBS Mortgage-Backed Securities?
  • How MBS bond convexity is positive (hint, it’s almost always negative)
  • Interest rates moving higher means less refinancing (and home sales) extending loan durations.
  • What is bond convexity and how does it relate to interest rate sensitivity risk?
  • High yield bonds and loans surprising outperformance over investment grade and treasuries
  • Divergence is higher now than before Silicon Valley Bank
  • Chicago Fed National Financial Conditions Index
  • S&P 500 Equal Weight Index vs the magnificent 7
  • How the S&P 500 Index forecasted next 12-month earnings are higher now
  • The forward PE ration of the S&P 500 Index back down to about 17.5 PE
  • Are we behind the trough in earnings?

Mentioned in this Episode:

Deep Dive: Can Bonds Recover? | TLT ETF Breakdown |Inflation and the Fed 

Bond Market Collapse 

Cheap vs Expensive Options | Warren Buffett on Options | Fed Powell Presser

0DTE Options Analysis| Inflation Coming Back? | Strong US Dollar Impact 

Implied Volatility Deep Dive | Real Interest Rate Yields | The Big Short | Tesla vs Nvidia 

GameStop Short Squeeze by the Reddit Wall Street Bets Traders Explained

The Big Short Movie and Credit Default Swaps Explained

Margin Call Movie and Understanding Value at Risk 

Jay Pestrichelli’s book Buy and Hedge 

Derek’s new book on public speaking Effortless Public Speaking 

Derek Moore’s book Broken Pie Chart