Bank stress caused by the Fed’s aggressive interest-rate-hiking regime, alongside the collapse of two regional banks, continues to spread tension throughout the banking sector. The fault lines are now laid bare and it remains to be seen whether the aftershocks of tightening bank lending will lead to any further economic and market impacts, creating uncertainty and longer-term volatility in the coming months that strategies like managed futures can potentially hedge for.
Banks that had stalled on raising deposit rates as Fed interest rates were raised are now faced with the reality of competing with money markets currently offering northward of 4% yields and other higher-yielding opportunities. Raising deposit rates to entice consumers and encourage deposits will further cut into profits in an already challenging environment for banks, and Goldman Sachs has estimated that each 10% decline in profits will lead to a 2% reduction in lending, reported WSJ. The U.S. banking system could be tightening by 3-6% this year (or more), curtailing economic output by another 0.5%.
Looming ever larger are unrealized losses as higher-risk commercial real-estate loans and industrial and commercial loans come due, which many banks padded their portfolios with during the period of pandemic fiscal stimulus and elevated deposits. Now, many banks don’t have the cash for these loans, and default risk could instill prolonged uncertainty and lack of confidence for depositors.
Image source: WSJ
The current environment is one in which the bank sector crisis “is in the second or third inning, not the seventh inning,” according to former Dallas Fed President Robert Kaplan on a call hosted by Evercore ISI. “I’m afraid we’ve got something coming that we don’t fully understand.”
Position for Prolong Banking Sector Stress With Managed Futures
Most advisors have positioned their portfolios for recession risk this year but the longer-term potential of banking sector stress could make the addition of a managed futures strategy that offers non-correlated returns to both equities and bonds a compelling one this year and looking ahead. The iMGP DBi Managed Futures Strategy ETF (DBMF) allows for the diversification of portfolios across asset classes uncorrelated to traditional equities or bonds.
DBMF is an actively-managed fund that uses long and short positions within the futures market on several asset classes: domestic equities, fixed income, currencies, and commodities (via its Cayman Islands subsidiary). The fund’s position within domestically-managed futures and forward contracts is determined by the Dynamic Beta Engine, which analyzes the trailing 60-day performance of CTA hedge funds and then determines a portfolio of liquid contracts that would mimic the hedge funds’ averaged performance (not the positions).
DBMF is currently down about -8.66% YTD, providing a buying opportunity for advisors and investors looking to add the non-correlated opportunities that managed futures can provide.
DBMF has management fees of 0.85%.
For more news, information, and analysis, visit the Managed Futures Channel.