Tue Mar 14
If you haven’t heard of The Graduate, go watch it. Dustin Hoffman at his best. At a pool party, young Benjamin is given one word to sum up his entire future… plastics. This may not be such a monumental moment but it could be the beginning of a shift. While SVB was certainly not a money-center bank, it shines a light on a developing issue. A mere 3% to 4% Treasury rate environment is enough to blow up a bank. Granted it was stupid to buy longer duration paper with such low coupon rates. But really…. a 4% rate environment should not be blowing up anyone. A decade of idiotic 0% rates is now manifesting itself.
Will the Fed cave now. Doubt it. But they now have to step carefully. I am still hopeful for a 25bp rate hike. 50bp is unlikely. Pausing would be a mistake and send the wrong message. What is looking more and more attractive is the intermediate area of the yield curve (5’s to 10’s). When the Fed does pause and recession takes a firm hold, this area should take off. I am looking at futures (ZN, ZT) and ETFs (IEF) to play this. IEF has weekly options to roll short puts. A less risky way to play the 4–4.5% yield resistance is with AWF. This Global High Income fund yields 8% and has an average duration of approximately 5 years. Pick your poison.
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