Market timing Inflation Protected Bonds?

[OverThinkMuch]

I have this odd idea to predict interest rates next year, even though the task is likely futile. My theory is that rates will rise more than expected. If I look at inflation protected bonds, there is Vanguard's (VTIP) among others. Listing pro and cons, I might have found the wrong investment.

On the upside, when inflation is higher than expected, TIPS protect against that assuming the CPI reflects that inflation. And during the last supply side inflation, TIPS did well.

The downside is that 2022 inflation is already priced in, so I only get the incrementally greater inflation. Second, the Fed has been heavily buying TIPS, inflating prices and hurting yields. Yields are -3% on TIPS, which isn't good.

What other investments are useful for acting on my theory that interest rates are going to rise faster than expected in 2022?

 

[Montecfo]

By "interest rates" what rates do you mean? I'm guessing short-term.

You could short high-multiple equities.

You could buy banks.

You could buy floating rate securities such as bank loans.

I agree with you that TIPS are not the way to go.

Good luck.

 

[njhowie]

If you believe interest rates will rise faster than expected, then the general rule is you want to be investing in banks and financials.

If you're looking at fixed income, then as interest rates rise, in theory, yields on CDs and other instruments should begin to rise as well. So, it may be time to consider laddering in to CDs which have not been worth touching over the past couple years. Similarly, with rising interest rates, yields on dividend paying common and preferred stocks should also rise...meaning their prices should move lower...which may provide other opportunities.

 

[NW-Bound]

Commodities producers.

 

[OverThinkMuch]

By "interest rates" what rates do you mean? I'm guessing short-term.

To be more precise, I mean the Federal funds rate set by the FOMC (the Fed), which tends to influence bank rates and treasury yields.

I agree with you that TIPS are not the way to go.

Thanks for confirming it - I'm waiting T+2 to correct that mistake.

 

[OverThinkMuch]

I prefer to invest in ETFs, so I'm avoiding CDs and similar instruments.

You could buy banks.

If you believe interest rates will rise faster than expected, then the general rule is you want to be investing in banks and financials.

It sounds like Direxion Daily Regional Banks Bull 3X Shares (DPST) would qualify, which I hold already. Another 1-2% there might be better than TIPS.

 

[OverThinkMuch]

Commodities producers.

Are there specific ETFs that fit this description?

Looking online, I see iShares U.S. ETF Trust iShares GSCI Commodity Dynamic Roll Strategy ETF (COMT) with 0.48% expense ratio and no K-1.
https://www.ishares.com/us/products/270319/ishares-commodity-etf


Speaking of specific commodities, oil seems more impacted by OPEC actions and demand recovery, clouding if it's a pure inflation play (USO up +74% in 12 mo). While 2021 had a big spike in inflation, gold took a loss (GLD -1% over 12 mo).

 

[OverThinkMuch]

In another thread I mentioned my reasoning - the Fed is pumping $1.5T into bond markets, with the Fed funds rate at 0%. I think they've already made a policy mistake, and will be either playing catch up or screw up next year.

If they play catch up, I mean the FOMC will raise rates 3+ times, surprising current estimates of 1-2 rate increases. While 'rate increase' is ambiguous, I think it means 0.25%, and I'm expecting more than 0.75% of FOMC Fed funds increases in 2022.

Or they play screw up, and if inflation remains high, consumers internalize the change. Instead of letting money sit at 0% in banks buying less over time, they buy things sooner. That accelerates inflation as demand spikes and the supply side continues to have problems.

I'll be wrong if all supply side problems clear up quickly in 2022. That would relieve the supply side inflation, which I believe is what the Fed expects. But the Fed has already been wrong about this, having expected inflation would already have fallen by now.

Today I shifted 2% of my portfolio into financials. I plan to do a little more later this week, but no huge portfolio change for me.

 

[aja8888]

Buy the XLF and you have financials covered.

 

[NW-Bound]

Are there specific ETFs that fit this description?

Looking online, I see iShares U.S. ETF Trust iShares GSCI Commodity Dynamic Roll Strategy ETF (COMT) with 0.48% expense ratio and no K-1.
https://www.ishares.com/us/products/270319/ishares-commodity-etf

Speaking of specific commodities, oil seems more impacted by OPEC actions and demand recovery, clouding if it's a pure inflation play (USO up +74% in 12 mo). While 2021 had a big spike in inflation, gold took a loss (GLD -1% over 12 mo).

The above is an ETF on commodities themselves. I do not have experience with them.

I was talking about shares of companies that produce commodities, or natural resources. For example, food growers, industrial metal miners, lumber companies, oil companies, etc... There are many sector ETFs that cover these industries.

 

[OverThinkMuch]

Buy the XLF and you have financials covered.

Agreed and partly done. I bought some deep in the money calls on XLF, which gives me leverage for a surprisingly cheap time value. I'll buy more before next week's FOMC meeting.

 

[OverThinkMuch]

Looks like I'm going to be right about inflation... but XLF and KRE haven't moved dramatically upwards. I guess time will tell - especially the time after this week's Fed meeting.

 

[Montecfo]

Well you are going to need the 10 year rate to rise for banks to really run. They have been declining.

That should turn around.

 

[OverThinkMuch]

I recall an FOMC meeting or two back, the Fed was still expecting 1 rate increase in 2022. After this week's Fed meeting, they are expecting 3 rate hikes in 2022. They plan another 2 hikes/year after that.

When I'm investing actively, I like to make predictions and then check if those predictions are consistent or not. The gradually increasing expectations for more rate hikes is consistent with my thesis.

Well you are going to need the 10 year rate to rise for banks to really run. They have been declining.

That should turn around.

Agreed. I assume the market gets excited by recent highs that are a round number, so I'll watch for reactions at 1.5% and 1.6%. While the Fed only controls Fed funds rate, I expect some of their rate hikes to translate to long term treasuries.

The 10year treasury yield is up today, according to Yahoo Finance. I haven't used this source of information before, but in this case I don't want to wait until the US treasury posts today's rate. But here are both:
https://finance.yahoo.com/quote/^TnX?ltr=1
https://www.treasury.gov/resource-c.../pages/TextView.aspx?data=yieldYear&year=2021