Bloomberg Daybreak: Asia Edition Sep 25, 2026
With Nancy Davis, Founder and CIO of Quadratic Capital Management
Money markets are pricing another 62.5 basis points of Federal Reserve rate increases before the end of 2026, and Nancy Davis said that has left part of the US swap curve inverted.
A lot of investors have been selling options for extra income while volatility fell for three years. Davis runs a fund built to profit when volatility rises, and on the day this segment was recorded it finally did.
"Today was a huge wake-up call for all the people out there that are selling options and thinking it's income."
Nancy Davis, Founder and CIO of Quadratic Capital Management, on Bloomberg Daybreak: Asia Edition. She founded the firm in 2013 and runs IVOL, the Quadratic Interest Rate Volatility and Inflation Hedge ETF, which holds long positions in interest-rate volatility.
The full segment is covered here so you can skip it.
Here are the 6 calls that matter.
Key Takeaways
The move in rate volatility was the biggest since COVID and SVB, and she thinks it is only the start
Investors selling options for income are short volatility, whether they call it that or not
The market prices 62.5bps more hikes for 2026, a couple of months before year-end
About 100bps between 2-year and 10-year rates is normal, and the US forward swap curve is below zero
Bond portfolios need positive convexity, because US mortgages carry negative convexity
The market is calling the Fed's hikes a policy mistake, in her reading of the inverted curve
1. A Volatility Shock
Treasury yields rose across maturities on the day, and money markets were fully pricing three rate increases over the next year. Davis was asked what was going on.
Tight credit spreads have pushed investors into selling options
"Well, we had a monster vol move today. Credit spreads in the U.S. are incredibly tight. A lot of people have been hanging out, especially in short-duration credit. And because credit is so tight, a lot of investors are selling options right now." — Nancy Davis
A credit spread is the extra yield a company bond pays over a Treasury. With spreads narrow, investors have looked for income elsewhere, and selling options pays a premium up front.
Selling an option is a bet that prices stay calm
"And note to everyone out there that is selling options, when you sell an option, you're short vol. And today, we had a monster move in rate vol." — Nancy Davis
For a fund that holds volatility, the falling market of recent years was painful.
"Every day for the last three years, it's like walking in and you get punched in the face" — Nancy Davis
The largest move since the first COVID shock and Silicon Valley Bank
"It was actually the biggest move after COVID, the first initial COVID shock in the U.S." — Nancy Davis
An anchor dated that shock to March 2020. Davis added Silicon Valley Bank's failure as the other comparison.
"Today was a huge wake-up call for all the people out there that are selling options and thinking it's income." — Nancy Davis
An anchor called the income trade "really just short gamma," meaning a position that loses faster the more prices move.
"And we had a massive short gamma move today in the rates market." — Nancy Davis
