The International Monetary Fund has urged the U.S. Federal Reserve to taper faster as inflationary pressures continue to rise, reports CNBC.
While the Fed was already considering faster tapering, the introduction of Omicron, the latest COVID variant that appears to be highly contagious, and the growth of several inflationary pressures, such as a big jobs report miss for November, have the IMF doubling down on pushing for faster Fed tapering.
“We see grounds for monetary policy in the United States — with gross domestic product close to pre-pandemic trends, tight labor markets, and now broad-based inflationary pressures — to place greater weight on inflation risks as compared to some other advanced economies including the euro area,” the IMF says in a blog post.
On top of supply chain concerns driven by fears from Omicron’s global effects, a disappointing jobs report was released this morning that showed that jobs growth was only 210,000 for November on a forecast of 573,000, reports CNBC. It’s a sign that the hiring slowdown began before Omicron’s discovery, and could be indicative of stronger inflationary pressures continuing.
Hedging Against Volatility and Inflation With IVOL
The Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL) from KFAFunds, a KraneShares company, is designed to have a twofold hedge against an increase in fixed income volatility and/or an increase in inflation. The fund also seeks to maximize on yield curve increases, either brought about by long-term interest rates increasing or short-term interest rates falling; both are tied to big equity market declines.
IVOL is the first of its kind in active and passive options and offers access to the OTC fixed income options market, the mechanism it uses for long interest rate volatility. The fund invests in a mix of U.S. Treasury Inflation-Protected Securities (TIPS) of any maturity, which are U.S. government bonds whose principal amounts increase with inflation.
It also invests in long options that are directly tied to the shape of the U.S. interest rate swap curve, which steepens when the spread between longer-term debt instrument swap rates and shorter-term debt instruments grows larger, flattens when the spread grows smaller, and inverts when the spread is negative.
Options are purchased up front with a premium in the OTC market, which typically has greater flexibility in terms between the buyer and seller, but there are fewer protections than on an exchange and no daily price fluctuation limits. Counterparties do not have to post variation margins, and there is no possible extra cash outflow or future liability for the fund under the options. The only risk is the premium that is paid up front, as well as IVOL’s options contracts being open to counterparty risk, a risk of non-performance by an options counterparty.
IVOL is actively managed by Quadratic Capital Management, an alternative asset management firm with experience in the options and volatility markets. It expects to invest less than 20% of the fund in option premiums and seeks to purchase options with a time-to-expiration between six months and two years.
IVOL carries an expense ratio of 1.05% and has approximately $3.3 billion in assets under management.
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