These aren’t just Treasury or low vol ETFs. We’re looking at tail risk, options and deflation hedge strategies.
Your first inclination might be to sell stocks and move into bonds, cash or some other defensive asset, such as gold. History shows that might not be such a good idea for now at least. In the five most recent yield curve inversions, the S&P 500 was up more than 10% a year later in four of those instances.
It’s almost as if investors know what’s coming, but they still want to squeeze every last drop of blood out of the turnip.
I suspect the first thing we’re going to see from the market is a rally in long-term Treasuries. While short-term rates are still moving higher based on what it expects the Fed to do, long-term rates have flattened. That’s a result of investors believing that the Fed will begin cutting rates again in the intermediate-term.
That’s also consistent with the idea that a recession could officially arrive within 18 months, if not sooner.
The overnight index swap (OIS) curve is confirming this. After expecting that target Fed Funds rate to peak at 3% sometime in the 1st half of 2023, the market is pricing in rate cuts during the 2nd half of 2023 and beyond.