Playing Interest Rate Volatility

Published on
June 27th, 2019
15 minutes

Playing Interest Rate Volatility

Trade Ideas ·
Featuring Nancy Davis and Raoul Pal

Published on: June 27th, 2019 • Duration: 15 minutes

Nancy Davis, founder and CIO of Quadratic Capital Management, introduces her new ETF that takes advantage of interest volatility and inflation expectations: IVOL. In this interview with Real Vision's co-founder & CEO Raoul Pal, Davis deconstructs the structure of the ETF, highlights the cost of carry associated with the strategy, and discusses her macro outlook and where she thinks the yield curve is headed next. Filmed on May 29, 2019.



  • JK
    Jay K.
    12 October 2019 @ 22:24
    It's interesting... but the expense ratio is too high.
  • CT
    Christopher T.
    3 July 2019 @ 01:11
    shes great
  • YW
    Yowshi W.
    2 July 2019 @ 23:59
    I have watched this 3x and I cannot grasp..very interesting
  • DB
    David B.
    1 July 2019 @ 20:59
    Is there a way to understand the sensitivity of the ETF's performance to changes in vol / long rates? I'm just wondering if it is possible to understand the delta, roughly speaking. Great idea - thank you!
  • DS
    David S.
    27 June 2019 @ 15:54
    Interesting. Current portfolio is 84.15% Schwab US TIPs ETF; 13.4% cash and 2.45% interest-rate swaps. Just asking if this has enough convexity to make a difference? Is the cash there to jump in and out of interest-rate swaps at the right time and the reason for the 1% expense ratio? I really do not know. At 5/14/2019 interest-rate swaps were at 6%. A little discussion on tactics would have been interesting. DLS
    • DL
      David L. | Contributor
      27 June 2019 @ 17:38
      The instruments being used aren’t swaps. As she clearly lays out in the presentation these are OTC derivatives on different points in the yield curve which are attractively priced at generational lows. Extremely sophisticated and hard to access, 1% for this type of product is massively inexpensive.
    • DS
      David S.
      27 June 2019 @ 18:46
      David L. - Sorry if I am incorrect. On the Schwab Summary IVOL page, they show Usd Cms 2-10 06/03/20 50 as 2.45% of the portfolio and identify the Holding Type as an Interest-Rate Swap. Maybe Schwab’s Holding Type is incorrect. What holding type do you believe these to be shown as by Schwab? I will be glad to forward the correction to Schwab. Do you believe that there is enough convexity with 84% of the portfolio in SCHP, the Schwab US TIPS ETF, at a reasonable portfolio sizing of 5% or less? Thanks for you comment as I am trying to understand the trade. DLS
    • MG
      Michael G. | Contributor
      28 June 2019 @ 13:27
      CMS is a “constant maturity swap”, effectively a call option on interest rate yield rather than a stream of coupons. As a result it has embedded convexity (as usually higher yields would show negative convexity due to an increased discount rate). This trade becomes further levered as it is against the 2s10s spread at 50bps strike. A steepening of the yield curve would result in this position rising sharply in price.
    • DS
      David S.
      28 June 2019 @ 19:04
      Michael G. - Thank you for answering my question about convexity. I will put on a trade. DLS
  • PU
    Peter U.
    27 June 2019 @ 14:32
    she is really Lady Gaga!
    • JO
      JOHN O.
      27 June 2019 @ 22:50
      LOL, maybe - they are both incredibly intelligent and talented people.
    • PC
      Peter C.
      28 June 2019 @ 15:35
      They are both beautiful, successful & certainly worth listening to.
  • DL
    David L. | Contributor
    27 June 2019 @ 17:31
    Excellent presentation and discussion. The asymmetry of this seems unique as well as the low cost of carry. Very interesting and thanks for sharing! DAL
  • JS
    John S.
    27 June 2019 @ 16:59
    Interesting conversation. Looks like a low risk way to own inflation protection but until CPI turns, its hard to see how this does anything other than dampen portfolio volatility. I think we can do that without tacking another 1% to management fees. What am I missing?
  • PC
    Philip C.
    27 June 2019 @ 15:09
    When you leave Goldman Sachs, do they give you your soul back?
  • DP
    Devraj P.
    27 June 2019 @ 14:59
    Justine - Platinum Jewelry combination would match the best !
  • NC
    Norman C.
    27 June 2019 @ 14:13
    Great interview and really interesting product. Hopefully volume increases in the ETF!
  • MT
    Mike T.
    27 June 2019 @ 10:25
    irrespective of the idea behind the ETF, right now no trading volume to speak of and most importantly no Options market either, hence at the moment not a good trading instrument as liquidity always comes first, second and third in list of pre 'flight' checks when considering establishing new positions in any underlying.
  • HC
    Himmat C.
    27 June 2019 @ 06:55
    I was about to write a letter to my senator if Nancy wasn't a part of vol month -- please forgive me for even doubting you, it won't happen again!