Analyst who denounced Libor as broken warns of rising ‘tsunami’ rate

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(Bloomberg) – Scott Peng knows problems when he sees them – and right now he’s spotting them in every market thanks to an impending interest rate “tsunami”.

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The head of Advocate Capital Management – who helped uncover modern banking’s biggest scandal with a damning 2008 report on Libor manipulation – has a plan. He is launching the exchange-traded fund Rising Rate Hedge as early as next week to ride a breakout in bond yields, as market-based measures of inflation hit their highest level in decades.

“There are so many forces that are ready to force rates up: the Fed’s cut in QE, the fiscal stimulus, the budget deficit and non-transitory inflation,” said Peng, who is chief investment officer. from Advocate, in an interview. “The Fed’s reaction function is pretty slow – you’re talking about 10 months before they can start raising rates, and if they’re wrong about the transient nature of inflation, that will lead to bananas in the long run. term.”

The actively managed fund, ticker RRH, will trade treasury bills and a host of derivatives on bonds, stock indices, currencies and commodities to generate returns when long-term U.S. interest rates rise, according to a case.

The Wall Street veteran of more than two decades has already spotted problems in the plumbing of financial markets. He became known as the co-author of a groundbreaking report titled “Is Libor Broken?” as head of rate strategy in the United States at Citigroup Inc. It helped trigger investigations that led to the banks paying billions of dollars in fines. Today, policymakers are locked in a battle to phase out the trillion dollar benchmark.

These days, Peng – who has previously warned of the risks of shadow banking – is squarely focused on the market disruptions caused by the interest rate takeoff. The intensifying supply chain and commodities crisis this week sent a measure of inflation expectations to their highest for more than 15 years. Traders estimate half a percentage point of Federal Reserve hikes by the end of 2022.

“The leading edge of the rising rate tsunami has arrived,” Peng, former managing director of Credit Suisse Group AG, wrote in a newspaper this month. “Investors who choose to do nothing as interest rates continue to rise may soon be faced with a much more difficult environment.”

The report calls the next part of the hiking cycle the “erasure” phase, in a warning to investors not covered in everything from government debt and high-yield credit to bond-sensitive tech stocks.

Peng argues that popular hedges tend to impose a high cost of ownership, or negative carry, which undermines performance over time. RRH is presented as a long-term investment and a central part of a portfolio.

Yet Advocate Capital is far from alone in targeting fears related to inflation and nominal bond risks.

Among other recent deposits, Pacer ETFs filed an application to create the Pacer Pacific Asset Floating Rate High Income ETF. The FolioBeyond Rising Rates ETF (RISR) was launched earlier this month. The Simplify Interest Rate Hedge ETF (PFIX) debuted in May and has garnered nearly $ 120 million in assets.

One of the most popular investing styles is the $ 35 billion iShares Treasury Inflation Protected Securities (TIP) ETF, which has added nearly $ 9 billion this year with a 4.2% return.

Some of the more specialized hedging products include the $ 3.6 billion Quadratic Interest Rate Volatility and Inflation Hedge (IVOL) ETF and the $ 1 billion ProShares Investment Grade-Interest Rate Hedged ETF (IGHG).

With no signs of slowing inflation at the moment, Peng sees an ever-increasing demand for hedging strategies.

“We plan to issue further risk mitigation ETFs,” he said.

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