JPMorgan’s Kolanovic Sees Credit as Good Way to Hedge Fed

(Bloomberg) -- Investors wanting to hedge risks arising from potential Federal Reserve policy changes should consider credit markets instead of equities, according to JPMorgan Chase & Co.

That’s because while credit markets are expected to be volatile, they offer a cheaper alternative relative to other hedges. U.S. high-grade and high-yield spreads have been widening since mid-July, and that more volatile trading environment may continue through the end of the month as the market digests the global impact of Covid-19’s delta variant and any possible change in Fed rhetoric at Jackson Hole, strategists led by Marko Kolanovic wrote in a Monday note. 

“While the market will likely hold up through Fed tapering, those wishing to hedge associated risk should consider using credit or credit volatility rather than equities given credit’s more limited upside and lower implied volatility levels,” the strategists wrote.

Markets are watching the Fed intently for signals on a tapering timeline, with the annual Jackson Hole conference at the end of the week and a September policy meeting not far behind, as policy makers work to strike a balance between the economic toll from Covid-19 and surging inflation. 

At the same time, unpredictable factors like Covid have kept investors nervous, with many hedges relatively expensive even as U.S. stocks trade around record highs. That’s spurred strategists to look further afield than typical measures like the VIX, where three-month contracts betting on a jump are the most expensive versus those seeing a drop since early 2018. Hence the look at credit markets.

“We are positive on spreads but anticipate near-term choppiness due to delta risks and Jackson Hole,” the JPMorgan strategists wrote.

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