The conversation about Hedgeye’s rising inflation call continued into Keith’s conversation with Nancy Davis.

Keith remarked how commodity markets are moving higher in light of rising inflation and Nancy commented on how “rates really haven’t moved and haven’t bought into the story of rising inflation. Inflation is really for sale and cheap.” CLICK HERE to watch the full interview.

Nancy began her career at Goldman Sachs where she eventually became Head of Credit, Derivatives and OTC Trading. So this point she’s making is interesting:

“The commodity markets have moved but the rates and the inflation markets aren’t things that people look at for inflation because they didn’t even exist back in the ‘70s. The rate derivative market started in the 2000s. Sure, there are swaps dated back to the ‘90s, if you pull way back, but there was no vol market or derivative market. Even the inflation protected bond market, the U.S. Treasury only started issuing TIPS in 1997. I think a lot of markets are pricing in inflation except the obvious things which are the rates markets.”

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As Nancy explains, right now the yield curve is inverted, meaning long-term bond yields are lower than the interest rate on short-term bonds. Nancy expects that a less inverted yield curve could cause a dramatic rise in fixed income volatility - as structured products sold to, for example, a Taiwanese Insurance companies or other Asian and European companies.

Nancy calls this sudden spike in fixed income volatility, "Volvexity."

This was a unique deep dive into the mechanics of fixed income markets and derivatives, with discussions around implications for the Fed, housing market and commodities.

Watch the entire Hedgeye Investing Summit discussion between Nancy and Keith here.

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