How to position for Wednesday's volatility (Bond markets)

Markets (fiat, that is) are waiting for this Wednesday (14th February) CPI numbers (inflation) from the USA. Volatility is likely to impact markets again. So brace investor, brace for it.

In the meanwhile, this is how you should position your bonds' portfolio.

bear in mind that this is just my opinion, hence you should consider asking your financial advisor for a more tailor-made proposal

The rationale of the suggestions are based on the below mentioned fundamentals.

Inflation should not be spike higher
Hence US Government bond yields should not increase much more than 3%, it would be unsustainable for the US Government as interest expense would reach somewhere around 8% of total GDP. Keep an eye on that.

This above, is the US Treasury curve (10 years yield minus 2 years yield), it is going to continue its decreasing (flattening) trend. By the way, check in 2005/2006, when the ratio goes negative, usually it is a leading indicator for a recession coming...

So how do you position your portfolio? Always diversifying your single line positions of course.

Consider having a duration barbell strategy. That is having short maturity High Yield bonds balanced with high quality Investment Grade bonds with medium to long duration.

What is the reason, given recent volatility, which I believe it to be a short term technical correction rather than the start of a bear market, High Yield spreads (the extra yield over US Government bond yield) has increased somewhat, so I think there are some opportunities now to lock-in higher yields. Similarly, for Investment Grade bonds, spreads have increased, and in addition to the latest increase in US Government bond yields, now returns for quality bonds have risen substantially, your investments in solid firms is going to pay you a good yield now, a rate of return which we have not seen in a year or more.

Any question?

Additionally I would recommend to invest in Floating Coupon bonds, the more the Federal Reserve increases its Fed Fund Rate the more Floating Coupon bonds would return you.

Are you positioned for this Wednesday inflation number?

You don't care?
What do you care about?
Do you see the near future as I do? Or you are more bearish?

Bests,

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