Last month I wrote a piece about not fighting the Fed — that is, not investing contrary to Fed policy.
That’s been a common theme for many years, as those who have done so have lost big.
Now, bond investors aren’t stupid. I was surprised last week when they continued to push yields lower after the Fed’s press conference, but they caught back on quick.
After the meeting, long-term rates were at 2.54%, sliding to 2.48% last Wednesday, March 25. By Friday, March 27, they were back up to 2.6% — even higher than at the time of the meeting the week prior.
Sure, it took a week to sink in, but these bond investors understand the big picture. Market participants who are betting that the Fed will not raise rates… do not.
The Fed stated very clearly — in their own weird, jargony way — that rates will likely go up as soon as the June meeting.
Since the employment mandate has been met, the Fed’s focus is squarely on inflation. If inflation is near the Fed’s expectation and near-term pressures can be written off as “transitory” — whether they are or not, as I discussed last week — then the Fed will more than likely hike rates. Mixed economic data besides, they’re going to do it.
When they do, it won’t just be one small hike followed by months of inactivity. History shows that the Fed doesn’t increase rates with one small hike, but a series of them.
This may be extremely predictable, but it will catch the entire investment community off guard. That means, when the reality of the first hike sinks in, expect major volatility in stocks and bonds.
There’s still going to be a lag. The Fed won’t raise rates tomorrow, or next month, and probably not the month after that.
But that doesn’t mean you should be positioned in investments against what the Fed is going to do. We are fast approaching that first hike, and that makes this territory risky.
However, with all the volatility that these movements create, there is opportunity to profit if you know what you’re doing. This is exactly what I do in Dent Digest Trader — capitalize on relatively small moves in interest rates by trading options. The investment community, while fickle, is extremely predictable, and it’s allowed me to generate some nice gains for my subscribers.