Recently, I was asked on CNBC Asia what I thought about fixed income at the present time.
My answer was that I thought having cash allocated to some is wise and that we were doing that as well.
Last year, I had the pleasure of meeting Nancy Davis from Quadratic Capital.
Their product, the Quadratic Interest Rate Volatility and Inflation Hedge ETF (NYSEARCA: IVOL) is “designed to hedge the risk of an increase in fixed income volatility and/or an increase in inflation expectations.
It also seeks to profit from a steepening of the yield curve, whether that occurs via rising long-term interest rates or falling short term interest rates, which are historically associated with large equity market declines.”
My past Daily’s have covered the risk to the equites market and the potential for higher inflation or at the very least, stagflation.
I have also talked about “normalization” where Fed Funds rates and the rate of inflation are in alignment.
The IVOL ETF is an instrument meant to benefit from that normalization while at the same time offering some protection against inflation.
The chart is interesting and of course, the timeframes differ.
A few things stand out on the daily chart for IVOL:
- The new high close since October 2024.
- The outperformance to the benchmark.
- The accumulation phase with IVOL over the 200-Day Moving Average (DMA).
- The circle I drew on real motion shows the bullish divergence in momentum that happened in February, just as the price started to clear the 50-DMA.
No doubt the daily chart makes a bullish case.
Looking at the weekly and monthly charts:
IVOL has cleared the 50-Week Moving Average (WMA) for the second week in a row, thereby confirming the phase change to recuperation.
Last time this instrument traded above the key weekly moving average was in May 2023.
That’s significant.
On the monthly chart, IVOL remains under the 23-month moving average, which we like to use as an indicator for 2-year business cycles.
Therefore, in the short term, IVOL is rallying in response to a stagflationary environment. Basically, with the economy slightly contracting, equities falling and inflation sticky, it’s a good place to be.
Nonetheless, the jury is out on whether this is a more sustaining sea change.
Should IVOL clear that 23-month, we must wonder whether the economy is about to enter a deeper recession, or worse, hyperinflation.
Twitter: @marketminute
The author may have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not represent the views or opinions of any other person or entity.
