Few people have shaped how Wall Street measures bond market risk like Harley Bassman. On the latest Tall Oaks Podcast, the man known as the “Convexity Maven” sat down with Branden DuCharme to talk about mortgage bonds, the borrowing boom tied to artificial intelligence, the Japanese yen, and what inflation does to government debt. Here is what stood out.
Who is Harley Bassman?
Bassman spent 26 years at Merrill Lynch, where he traded options on mortgage bonds and created the MOVE Index, a widely followed gauge of interest rate volatility. He later worked at Credit Suisse and PIMCO. Today he describes himself as a free agent who writes commentary when something interests him. It is free at ConvexityMaven.com, along with an archive of his past work.
The MOVE Index: a “VIX for bonds”
When the VIX launched, Bassman saw the need for a bond version. (Cboe introduced the VIX in 1993, a year earlier than Harley recalled on the show.) The MOVE Index works the same way. If the VIX reads 17, Harley explained, there is roughly a 68% chance the S&P 500 will be up or down about 17% a year from now, which is one standard deviation. A MOVE reading of 80 carries the same idea for bonds, with yields moving up or down about 80 basis points. It is a frame of reference for how worried markets are about the path ahead. He also noted that higher volatility usually means less liquidity, which makes it harder to move bonds around.
Why a mortgage bond works like a covered call
Branden described a mortgage bond as the original covered call fund, and Harley agreed. In his simplified version, owning a mortgage bond is like buying a 10-year Treasury and selling a call option, because the homeowner can refinance whenever they want. Upside is limited, since the bond gets “called away,” while the downside is not. In exchange, investors are paid roughly 100 basis points more than Treasuries, without taking credit risk.
That trade-off is what Harley calls negative convexity. His plain-English version: if a bet lets you win one or lose one, that is linear. Win two and lose one is positive convexity. Lose three and win two is negative convexity, and you should demand a higher yield to take it.
Why the “convexity beast” is waking up
In a May 2026 commentary, Harley wrote about the return of negative convexity in mortgage-backed securities. After the pandemic refinancing wave, most mortgage bonds carried low coupons and traded at deep discounts, so the refinancing option inside them was nearly worthless. Over time, loans get repaid and replaced with new ones at higher rates. In that commentary, he notes that the share of the 30-year mortgage index with a coupon of 5% or higher rose from 13% to 34% between October 2023 and May 2026.
The result is a larger chunk of the market trading near par, where negative convexity is greatest. Harley said a mortgage bond near par has a duration around four, while one trading near 85 can have a duration around seven. Managers who want to hold their risk steady may need to trade, and he argued that selling can push rates higher across the whole market. He also pointed out that today’s market is more passive and less dominated by Fannie Mae and Freddie Mac portfolios than in the early 2000s, which he thinks makes the effect milder than it was then.
AI borrowing and Treasury yields
Branden asked how higher rates affect the AI buildout. Harley pointed to his latest commentary, “In FED We Trust,” which shows projected borrowing of about $750 billion by the five largest hyperscalers, compared with roughly $2 trillion of net government borrowing he expects next year.
His view is that these companies are not rate sensitive. He described them as in an existential race, so paying 7% or 9% is “the same number” to them, and he expects them to issue debt regardless. He also believes they have plenty of cash flow to cover their coupons, so default is not the concern. The concern, in his words, is “not for them but for us.” More corporate supply could push Treasury yields higher, which raises the government’s own borrowing costs.
Do higher rates still matter?
Harley laid out three ways rates can affect markets: the balance between stocks and bonds in a portfolio, whether companies can find projects that clear a higher hurdle (a 3% return project works when you borrow at 1%, not at 5%), and how future cash flows are discounted when valuing stocks. He thinks all three matter less right now because so much money flows into the market passively through workplace retirement plans, regardless of price. In his view, that flow would only fade if unemployment rose meaningfully. He also pointed listeners to the passive-investing research of his friend Mike Green.
The yen, the dollar and who buys Treasuries
For nearly two decades, Harley said, professionals borrowed cheaply in yen to buy higher-yielding dollar assets, the yen carry trade. As Japanese rates have risen faster than U.S. rates, that gap has narrowed. If big foreign buyers stop adding to Treasury holdings while the U.S. keeps issuing more, that is a problem. He added that real rates and inflation matter more than headline rate differences, and that most currency activity sits beneath the surface, like an iceberg, in the hedges corporations use years into the future.
Debt, interest costs and inflation
Harley explained that the government may borrow about $2 trillion net but issue closer to $3 trillion gross, because maturing debt has to be rolled over. As old low-coupon debt is refinanced at higher rates, interest payments as a share of GDP, flat for decades, start to climb. He said there is a point where that is unsustainable, though he is not sure where and it may be beyond his lifetime.
His view of the likely path is inflation, which he called a slow, silent tax that shrinks debt relative to GDP because the amount owed is fixed. That is why he favors things that cannot be printed, such as companies with solid businesses, real estate or gold. He described gold as an alternate currency rather than an asset: it pays no interest, moves slowly and “tends to gap,” which makes it very hard to trade.
Key takeaways
The MOVE Index is a measure of expected bond volatility, and higher readings usually mean thinner liquidity.
A mortgage bond behaves like a Treasury with a covered call attached, which is why it carries negative convexity.
Harley believes more mortgage bonds trading near par could make rates more sensitive to forced trading.
In his view, AI borrowers will issue debt at almost any rate, and that supply can lift yields for everyone.
He sees inflation as the most likely long-run way governments reduce debt relative to GDP.
Questions to bring to your advisor
This episode is educational, not a recommendation. If it raised questions about your own situation, consider asking:
How much of my bond exposure is in mortgage-backed securities, and how would it behave if rates moved?
How would rising Treasury yields affect the stocks and bonds I own?
Is my portfolio built around the traditional 60/40 mix, and how would it hold up in a period of persistent inflation? (Branden shared his view on the show that 60/40 is dead.)
How much currency exposure do I have in international holdings?
If you would like to talk through any of this, schedule a conversation with DuCharme Wealth Management.
Frequently asked questions
Who is Harley Bassman? Harley Bassman, known as the “Convexity Maven,” spent 26 years at Merrill Lynch and created the MOVE Index. He now publishes free market commentary at ConvexityMaven.com.
What is the MOVE Index? The MOVE Index is a widely followed measure of expected interest rate volatility in the U.S. Treasury market, often described as the bond market’s equivalent of the VIX.
What is negative convexity? Negative convexity means an investment can lose more when rates move against it than it gains when they move in its favor. Mortgage bonds have it because homeowners can refinance when rates fall.
Why do mortgage bonds yield more than Treasuries? Harley explained that investors are paid extra, roughly 100 basis points, for taking on limited upside and unlimited downside, even though neither carries meaningful credit risk.
Where can I read Harley Bassman’s commentary? His commentaries are free at ConvexityMaven.com.