Interest rates have a significant affect on economic growth, inflation, the housing market, equity valuations, bond valuations, and even gold prices.
The interest rate yield curve, in particular, is a key metric for an economy. The yield curve is defined as the difference between long-term interest rates and short-term interest rates, those which are set by the central bank. It is often determined in the United States using the difference between 10-year Treasury interest rates and 2-year Treasury interest rates. It’s typically viewed as the most reliable of recession indicators in the United States, although less clear internationally.
The U.S. Treasury yield curve inverted again Monday, with the 10-year note yield falling below the yield of the 3-month bill, as trade tensions led nervous investors to buy long-term government bonds. This can be an ominous sign for the future.
To capitalize on the current fixed income market trends, Quadratic Capital Management today debuted its first exchange-traded fund, the Quadratic Interest Rate Volatility and Inflation Hedge ETF (NYSEArca: IVOL).
According to Quadratic Capital, “IVOL is a first-of-its-kind fixed income ETF which seeks to hedge against an increase in inflation, and to profit from an increase in interest rate volatility and a steepening of the yield curve, whether that occurs via rising long-term interest rates or falling short term interest rates. A steepening yield curve has historically been associated with large equity market declines.”
Quadratic’s Managing Partner and Chief Investment Officer Nancy Davis will manage IVOL, which is an ETF built to utilize Quadratic’s in-depth knowledge of the OTC option markets.
“I could not be more excited to launch IVOL in the current market environment with volatility at generational low levels and the flat nature of the yield curve,” commented Davis, who was Head of Credit, Derivatives and OTC Trading for Goldman Sachs’ proprietary trading group before founding Quadratic. “No other active or passive ETF provides its investors access to this market. This access is the key to IVOL’s many applications.”
According to Quadratic, IVOL may provide a potential hedge for numerous components of an investor’s portfolio, including:
- Fixed Income: IVOL seeks to provide steady, inflation-protected income, a hedge against increasing inflation, and a potential asymmetric payoff when long-term interest rates become higher than short-term interest rates.
- Equities: IVOL may act as a tail hedge, as historically the curve has steepened in large equity sell-offs.
- Real Estate: IVOL may help hedge the risk of real estate asset depreciation brought on by rising long term interest rates.
- Volatility: IVOL seeks to provide an attractive new means through which investors can add long volatility exposure without some of the structural drawbacks of current offerings in the market.
For more new ETF launches, visit our New ETFs category.