Stocks plunged after the release of a red hot Consumer Price Index reading for May. The report showed an increase of 8.6% year over year, surpassing consensus expectations of an 8.3% increase. At the start of today’s session, the major indices were on track for another losing week.
Chatter on Wall Street has been intensifying around concerns that the Fed’s attempt to beat inflation could inadvertently push the economy into a recession. May’s higher-than-expected CPI data could inspire the Fed to ramp up its aggressiveness.
“There are huge events, geopolitical events going on around the world, that are going to play a very important role in the economy in the next year or so,” Fed Chair Jerome Powell said at a press conference following minutes from the most recent FOMC meeting. “So the question of whether we can execute a soft landing or not, it may actually depend on factors that we don’t control.”
While all attention is focused on inflation right now, recession cycles come with a more substantial risk for deflation. Today we’re focusing on an investment that provides access to a part of the market usually reserved for large institutions that can help hedge a portfolio against the effects of deflation and the compression of the yield curve.
Multiple rounds of fiscal stimulus have dramatically worsened extreme over-indebtedness in response to the global pandemic. The potentially upcoming deflation may create the most challenging economic environment for investors yet. The KraneShares Quadratic Deflation ETF (BNDD) is a fixed income ETF that seeks to benefit from lower growth, deflation, lower or negative long-term interest rates, and/or a reduction in the spread between shorter and longer-term interest rates by investing in US Treasuries and options.
The BNDD portfolio is composed primarily of long-dated US treasury bonds. In addition to bonds, the portfolio includes long-only options on the shape of the US interest rate curve. As interest rates decline, the bonds should appreciate in price. The options provide exposure to the spread between interest rates at different points in time. As the curve flattens because of lower inflation expectations and/or deflation, the price of the options tends to increase.
BNDD provides a unique access point to OTC fixed income options market, which is typically not available to investors directly. The fund has the potential for enhanced returns in periods of lower growth while the options downside is limited to the market value of the options. This strategy can serve as a bond enhancement strategy and works well as a complement to other diversifying investments. Since its inception less than one year ago, BNDD has essentially matched the performance of the S&P 500 with a fraction of the risk.
Should you invest in BNDD right now?
Before you consider buying BNDD, you'll want to see this.
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And it's not BNDD.
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Keith say’s he thinks investors will be able to turn a small $50 stake into $150,000.
Find that to be extraordinary?
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But you have to act now, because a catalyst coming in a few weeks is set to take this company mainstream... And by then, it could be too late.
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