Stocks ticked higher in early trading as investors processed minutes from the May FOMC meeting, released yesterday. According to the minutes, participants “noted that a restrictive stance of policy may well become appropriate depending on the evolving economic outlook and the risks to the outlook.”
According to CME Group data, current market pricing has the Fed moving to a policy rate around 2.5% – 2.75% by the end of the year, consistent with where many central bankers view a neutral rate. However, comments from the May FOMC meeting minutes indicate that the committee is prepared to go beyond there, moving policy past “neutral” and into “restrictive” territory. Because of the Fed comments, concerns have been intensifying that the Fed’s attempt to beat inflation could inadvertently push the economy into a recession.
“There are huge events, geopolitical events going on around the world, that are going to play a very important role in the economy in the next year or so,” Fed Chair Jerome Powell said last week. “So the question whether we can execute a soft landing or not, it may actually depend on factors that we don’t control.”
While all attention is focused on inflation right now, recession cycles come with a more substantial risk for deflation. Today we’re focusing on an investment that provides access to a part of the market usually reserved for large institutions that can help hedge a portfolio against the effects of deflation and the compression of the yield curve.
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Extreme over-indebtedness has been dramatically worsened by multiple rounds of fiscal stimulus in response to the global pandemic. Deflation may be the most challenging economic environment for investors.
KraneShares Quadratic Deflation ETF (BNDD) is a fixed income ETF that seeks to benefit from lower growth, deflation, lower or negative long-term interest rates, and/or a reduction in the spread between shorter and longer-term interest rates by investing in US Treasuries and options.
The BNDD portfolio is composed primarily of long-dated US treasury bonds. In addition to bonds, the portfolio includes long-only options on the shape of the US interest rate curve. As interest rates decline, the bonds should appreciate in price. The options provide exposure to the spread between interest rates at different points in time. As the curve flattens because of lower inflation expectations and/or deflation, the price of the options tends to increase.
BNDD provides a unique access point to OTC fixed income options market, which is typically not available to investors directly. The fund has the potential for enhanced returns in periods of lower growth while options downside is limited to the market value of the options. This strategy can serve as a bond enhancement strategy and works well as a complement to other diversifying investments. Since its inception less than one year ago, BNDD has essentially matched the performance of the S&P 500 with a fraction of the risk.
Where to invest $1,000 right now...
Before you consider buying BNDD, you'll want to see this.
Investing legend, Keith Kohl just revealed his #1 stock for 2022...
And it's not BNDD.
Jeff Bezos, Peter Thiel, and the Rockefellers are betting a colossal nine figures on this tiny company that trades publicly for $5.
Keith say’s he thinks investors will be able to turn a small $50 stake into $150,000.
Find that to be extraordinary?
But you have to act now, because a catalyst coming in a few weeks is set to take this company mainstream... And by then, it could be too late.
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