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Options Theory: Fun with Rates, TINA, and TIARA

October 25, 2018

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Options Theory: Fun with Rates, TINA, and TIARA

Today the “theory” part of our blog title takes center stage. Increased chatter on the impact of higher interest rates is making the rounds, so I wanted to bring it to your attention if it wasn’t already.

First, a world where cash pays over 2% is markedly different from one in which it pays zero. And, well, short-term rates are now north of 2%, their highest levels in a decade. Take a gander at the accompanying chart which shows this month’s evolution of Treasury yields with varying maturities:

At 2.21%, 1-month T-bills are looking mighty fine these days. Cash is no longer trash. No longer do greenbacks act as a drag on portfolio performance. Thanks to inflation and the actions of the Federal Reserve, Benjamins are now beloved, an active contributor to your investments.

As discussed in-depth within the Bear Market Survival Guide, interest rates drive investor behavior. Think about asset allocators, the shepherds of capital. As rates rise, the role of cash and its equivalents (short-term T-bills, essentially) begins to be rethought.

Meet, TINA

One of the most popular acronyms of the post-2008 crisis era was TINA, as in There Is No Alternative. It was an oft-uttered adage used to support the purchase of stocks. With rates at zero, equities were the only game in town for investors. Cash paid zip and the rates of return even in long-term bonds were paltry.

Against such a backdrop money managers shift money out of safer stuff (cash, bonds) and into riskier stuff (stocks, REITs). Taking risk was necessary, they reasoned. Where else is Grandma going to get income?

Though it took years for low rates to have an inflationary effect on the economy, the impact was felt quickly and more dramatically with asset prices. As we know now, the ultra-low rate policies were one of the primary contributors to what has become a cyclical bull market for the history books.

But the pendulum is swinging, and while its trajectory reversed all the way back in 2015 when the Fed first started raising rates, traders are finally (it seems) beginning to change their behavior.

And Now, TIARA

With one-month Treasury Bill yields now well above the S&P 500’s dividend yield (2.21% versus 1.94%) as well as core inflation rates for the first time since 2008, TINA is a thing of the past.

Now it’s all about TIARA.

There Is A Real Alternative

This crafty acronym was the brainchild of Mark Haefele, chief investment officer of UBS Global Wealth Management. Here’s the money quote mentioned in the FT article:

“The existence of lower-volatility alternatives to equities with positive real returns is now leading some investors to question whether stock market volatility is still worth enduring,” Mr Haefele wrote to clients last week. “These concerns came to a head in the recent equity sell-off, which included the worst week for global markets since February.”

You better believe the savvy stewards at the helm of billions and trillions of dollars who believe in rebalancing and the reality of the business cycle are taking a good look at the percentage of assets invested in stocks. Wouldn’t you do the same given that we’re soon to be entering year ten of one of the longest bull markets on record?

Now, this isn’t to say that the bull is dead and this month’s rug-pull is for sure the beginning of the next bear market. The jury is still out on that. But there is no doubt that rates have lifted enough to enter the collective consciousness of investors and lead to the type of portfolio tweaking that could hamper stock returns for a spell.


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