The Convexity Maven’s Biggest Macro Trades of 2026: Why Bonds, Gold, and Debasement Matter Again in 2026 | Harley Bassman

Episode Summary

Executive Summary: Harley Bassman argued that the U.S. is in a "higher for longer" inflation regime driven by demographics, immigration, and large fiscal deficits, implying stubbornly higher nominal rates and a likely steeper yield curve. He favored mortgage bonds, convexity-based hedges, leverage-sensitive credit trades, oil/MLPs, and gold as a fiat-debasement hedge, while stressing portfolio sizing and long-term discipline over timing.

Main Topics: Persistent inflation and higher-for-longer regime (Priority: 5/5): Bassman said inflation is unlikely to return to 2% soon, citing demographic pressures, immigration constraints, and fiscal deficits as structural drivers of price and wage pressure. Bond market outlook and yield-curve steepening (Priority: 5/5): He expects the 10-year Treasury to center around 4.35% and believes front-end rates can fall while the long end stays elevated or rises due to supply and fiscal borrowing. Mortgage-backed securities as a safer carry trade (Priority: 5/5): Bassman prefers newly issued agency MBS for their higher yield versus investment-grade credit and lower duration/volatility than legacy MBS indices. Convexity-based ETF hedges and bond bull trade (Priority: 4/5): He discussed ultra-long-dated option structures that provide positive convexity, capital efficiency, and insurance against large rate moves in either direction. Credit caution and leverage-sensitive funds (Priority: 4/5): He is cautious on credit because bankruptcies are rising and private credit is under-marked, but likes high-quality BDCs, mortgage REITs, and leveraged funds as the curve steepens. Oil, MLPs, and energy scarcity (Priority: 3/5): Bassman remains constructive on energy, especially MLPs and natural gas exposure, arguing that baseline power needs and capital constraints make oil and related assets durable investments. Gold as fiat-currency hedge (Priority: 4/5): He views gold not as a productive asset but as an alternative currency and inflation/debasement hedge, recommending a modest allocation as a store of value.

Key Arguments: Inflation is structurally sticky around 3%, not transitory, because labor, demographics, and fiscal policy keep pressure on wages and prices. Reducing immigration reduces GDP growth because GDP is driven by people, hours, and productivity. A 6%-plus fiscal deficit in near-full-employment conditions supports growth and inflation but weakens the dollar over time. The 10-year Treasury fair value is around 4.35% because expected policy rates plus term premium still justify that level. The front end should come down if the Fed cuts, but the long end can rise because Treasury supply is heavy and QE is unlikely to return. Newly issued agency MBS offer better yield per unit of risk than IG credit and less duration risk than older MBS portfolios. Ultra-long-dated option ETFs can provide asymmetric protection because they embed positive convexity and low capital requirements. High-quality leveraged vehicles become more attractive as short-term borrowing costs fall below portfolio yields, especially if the yield curve steepens. Private credit and some credit markets may be mispriced because reported book values lag reality and rising bankruptcies have not fully hit public spreads. Gold should be treated as an alternate currency and a hedge against fiat debasement, not as a productive investment asset.

Data Points: Expected inflation level: ~3% - Bassman said he does not expect inflation to return to 2% soon and sees it staying around 3%. U.S. fiscal deficit: 6% to 6.5% of GDP - He cited current deficit spending as unusually large for a near-full-employment, non-war environment. 10-year Treasury fair value: 4.35% - His stated center-of-gravity estimate for the 10-year yield in 2026. Fed funds target estimate: 2.7% to 2.88% - His assumed policy-rate level used to derive his 10-year yield estimate. Term premium / spread assumption: 147 bps - He added this to the expected funds rate to get his 10-year fair value. Nominal GDP expectation: 5% to 5.5% - He linked long-run rates to nominal GDP growth as a rough equilibrium anchor. Top stocks’ market share: About one-third of the market - He noted that the top eight companies comprise roughly a third of market cap, amplifying passive flows. Unemployment threshold assumption: 5% - He used this as a rough point where 401(k) contributions would start to slow because people lose jobs. Mortgage bond spread vs IG credit: ~100 bps vs ~50 bps - He argued MBS offer roughly 50 bps more yield than IG credit with less risk. MOVE index: 70s - He said implied rate volatility has fallen from the 120-140 range to the 70s. MOVE index last year: 120-140 - Used to show options/convexity structures were much more expensive a year earlier. Stock of Social Security recipients earning over $100k: About one-third - He referenced this to justify means testing as a likely future policy change. Gold allocation suggestion: 5% to 10% - He recommended a modest strategic allocation as a currency hedge. Oil/MLP yield range: 8% to 10% - He cited tax-advantaged yields on selected MLPs as attractive income. Leverage fund yield example: 9% to 10% - He said some high-quality leveraged vehicles currently offer these yields. ARCC price move: 22 to 19+ - He used Ares Capital as an example of a high-quality BDC that has become more attractive after selling off. Agency MBS duration: ~5 years or less - He described newly issued mortgage securities as lower duration, more liquid, and easier to hold. Older MBS coupons mentioned: 2% to 3% - Legacy MBS with low coupons were cited as longer-duration and more volatile than new issues. Potential population decline in China: 1.3-1.4 billion to 800 million in ~40 years - He used China as an example of severe demographic stress from the one-child policy.

Pivotal Quotes: "I don't see 2% coming back anytime soon." — Harley Bassman: His core inflation outlook and rationale for keeping duration modest. "Sizing is more important than entry level." — Harley Bassman: His closing advice on portfolio construction and risk management. "It's an alternate currency... It's a currency and it's a hard currency, it's not being printed by anybody." — Harley Bassman: His explanation of why he owns gold as a fiat-debasement hedge.

Implications: Listeners should expect persistent inflation, a steeper curve, and continued regime support for hard assets and convexity. Bassman’s framework favors diversified hedges, selective yield, and disciplined sizing over trying to call exact market timing.