Sticky inflation means the Fed put slips away

Volatility markets in rates and equities are sending different signals. Equity volatility has fallen back to pre-COVID levels while rate volatility is still elevated. Ben Bowler suggests that despite lots of uncertainty in rate markets, equity investors are still conditioned to "buy the dip." But high inflation means that the free Fed backstop is no longer and tail risks are greater. The low level of implied equity volatility means that there's an alternative to the Fed put--one can own volatility. Inflation also means that Treasuries aren't the hedge they once were, instead, Bruno Braizinha has been having conversations with investors about owning volatility as their hedge rather than Treasuries. Bruno also warns us that the full impact of rate hikes hasn't hit yet.

 

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