Porfolio Armor

The Best Time To Raise Rates

Ahead of Wednesday’s Federal Open Market Committee meeting, the most likely scenario, according to JP Morgan trader Andrew Tyler, is a 76 basis points rate hike and hawkish commentary. Some have questioned, though, whether the Fed would be wary of being too hawkish ahead of next week’s midterm elections.

Ordinarily, the Fed would be concerned about being seen to impact the midterm elections, but since the Democrats have been predicted to do poorly in the midterms all year,

That has taken some political pressure off of the Fed. Since polls have predicted Democrats would suffer big losses this year, that has given the Fed the freedom to raise rates aggressively without being blamed for Democrats’ electoral losses (since they were predicted to happen anyway).

Using the same political lens suggests the Fed will keep tightening until they’re sure they’ve driven a stake through the heart of inflation. That way, they can pivot to easing–or at least stop tightening–before the 2024 election campaign gets in full swing. Consider an alternate scenario: the Fed pivots in early 2023, inflation heats up again, and then they’re forced to start another tightening cycle and get blamed for interfering in the 2024 elections by doing so. Better to err on the side of being hawkish now.

Still Bearish On Treasuries

For months, Portfolio Armor has remained bearish on Treasuries despite the market bounces. For example, our top ten names on July 21st included two bearish bets on Treasuries, the ProShares UltraPro Short 20+ Year Treasury ETF (TTT), and the Direxion Daily 20+ Year Treasury Bear 3X Shares ETF (TMV).

Since then, those short Treasury bets are both up more than 66%, with that top ten cohort up 13.21% on average, while the market-tracking SPDR S&P 500 Trust ETF (SPY) is down 2.75%.

Last Thursday, TTT was in our top ten names again, along with more recent play on higher rates, the Direxion Daily Real Estate Bear 3x Shares ETF (DRV).

As always, we suggest hedging if you buy any of these names, but especially leveraged ones like TTT, TMV, and DRV. If the Fed surprises to the dovish side on Wednesday, those names can swing hard against you.

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