Supply chain restructuring could cause inflation; IVOL hurdles

The increased pressure that the war in Ukraine has placed on an already strained global supply chain could cause countries to double domestic growth and companies to retreat from reliance on the global supply chain. That’s according to Larry Fink, CEO of BlackRock, in an annual letter to shareholders, as reported by the Financial Times.

The impacts of the pandemic on supply chains have been numerous, ranging from closures resulting in months-long backlogs at major ports, to material shortages, to increased consumer demand well in excess of the offer. Today, the withdrawal of Russia by Western countries and the impacts of the war on raw materials and energy have put additional pressures on companies and countries around the world.

“The Russian invasion of Ukraine ended the globalization we have known for the past three decades,” Fink wrote, adding that “businesses and governments will also look more broadly at their dependencies on This may lead companies to develop more of their operations onshore or nearshore, which will lead to a faster withdrawal from certain countries.

As companies seek to increase their production of materials that are difficult to obtain in their own countries, this could lead to a complete restructuring of global trade.

“Large-scale redirection of supply chains will be inherently inflationary,” Fink wrote.

This is one more potential inflationary pressure to pile into an already overflowing basket of inflationary factors as markets continue to experience volatility as war rages and inflation persists in the United States. .

Protect against fixed income volatility and rising inflation

the Quadratic Interest Rate and Inflation Volatility Hedging ETF (IVOL) of KFAFunds, a KraneShares company, is designed to double hedge against an increase in fixed income volatility and/or an increase in inflation. The fund also seeks to maximize increases in the yield curve, caused either by rising long-term interest rates or falling short-term interest rates; both are tied to steep declines in the stock market.

IVOL is the first of its kind in active and passive options and provides access to the OTC bond options market, the mechanism it uses for long-term interest rate volatility. The fund invests in a mix of US Treasury Inflation-Protected Securities (TIPS) of any maturity, which are US government bonds whose principal increases with inflation.

It also invests in long options directly linked to the shape of the interest rate swap curve in the United States, which steepens when the difference between the exchange rates of long-term debt instruments and the Short-term debt instruments rise, flatten as the spread narrows, and reverse. when the spread is negative.

IVOL is actively managed by Quadratic Capital Management, an alternative asset management firm experienced in the options and volatility markets. He plans to invest less than 20% of the fund in option premiums and seeks to buy options with an expiry date of between six months and two years.

IVOL has an expense ratio of 1.05% and manages approximately $1.8 billion in assets.

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