After such a long bull market, it makes sense for investors/traders to be prepared to buy the downside. After all, when did they have to be afraid of a big drop? They’ve certainly happened, and the Fed has always come to the rescue. Even if they do nothing, the notion itself becomes reality: the Fed will always have your back.
But as we have learned over the past few months, this is far from the truth. The Fed is “allegedly” on a campaign to curb high inflation. If there’s anything more toxic about risking real estate than raising interest rates, I’d like to know. A rate hike is intended to cool the economy and reduce inflation, if indeed it does, as it certainly does today.
However, there is a strange lack of fear in the markets and it has me quite confused. There is no doubt that the shocks of the huge drop in recent months have left most investors stunned. Four of the first five months of the year have shown negative yields and with the Fed only raising rates twice so far there is no doubt that more rate hikes are on the way.
The futures market will indeed experience a huge rise in interest rates over the next few months. We can see that the policy rate is much higher than today (0.75). This market sees the overnight rate at 2.5% through the close of the September session.
Even if the market drives prices higher, they’re not pricing in the impact on the economy, which will inevitably take a hit. But the volatility in the markets is low, so nobody really cares about high interest rates or even cares. Someday that will change, will it be too late? Today, with volatility relatively cheap and safety equally affordable, your best bet is to cover your tracks with a few index puts and lots of cash, because when fear builds sharply (as it did on Friday), then you want this protection.
This article was submitted by an outside contributor and may not represent the views and opinions of Benzinga.