According to credit strategist Ben Bennett there are a couple of significant dangers to keep in mind when attempting to position for an expected base rate rise.
The first problem is crowded positioning, which can distort how markets react to information such as new employment data. When strong numbers come out a small rise in rates can be seen but it is not sustained because many investors have already positioned themselves for the news. On the negative data side, such as weak GDP numbers for example, another problem can occur where any sell-off quickly dissipates because of the underlying belief that sooner or later rates have to go up.
The other main issue Bennett sees with the current situation is that there is considerable uncertainty over how economies will react to any base rate hike cycles. There has not been a hiking cycle for many years and the situation is to a large extent unprecedented now given where corporate, household and government debt levels are around the world.
Bennett also estimates there is only a 10% to 20% chance that economic data in the coming months will surprise on the upside and lead to central banks around the world reaching for the lever of monetary tightening sooner than consensus expectations.
This all being so Bennett is recommending only a small repositioning for higher rates in the very near term and the maintenance of a cautious overall credit risk view.
