How hikes transmit through the economy
Discount rates: Higher policy expectations lift risk-free curves used in valuation models — compressing long-duration asset prices.
Credit cost: Loans and refinancing become more expensive; spreads can widen into slowdowns.
FX & flows: Rate differentials attract capital to higher-yielders, creating cross-asset ripple effects.
Volatility: Tighter liquidity often elevates realized/implied vol; correlations can flip regimes.
What it tends to mean by asset class
- Equities: Higher discount rates pressure P/E, especially for long-duration growth; quality/value often hold up better.
- Bonds: Prices fall as yields rise; later, duration can work when pause/pivot odds rise.
- Credit: IG is relatively resilient; high yield suffers if earnings slow and refi risk climbs.
- Real assets: Cash-flowing infrastructure with pricing power can buffer; cap-rate expansion is a headwind to some real estate.
- Digital assets: Liquidity-sensitive; macro beta increases during tightening.
Chart: Policy rate vs. equity multiples (illustrative)
ETS’s practical playbook
- Duration discipline: Tilt toward shorter-duration equities; add duration later as pivot odds rise.
- Barbell bonds: Carry on the short end + optional duration adds.
- Dynamic hedging: Long-vol/index overlays when bear-probability crosses thresholds.
- FX aware: Respect rate-differential trends; size unhedged risk within vol budgets.
- Liquidity first: Turnover caps and kill-switches help avoid forced selling.
Scenario matrix (illustrative)
#1 Soft-landing hike cycle
- Modest slowdown; inflation cools.
- Quality/value lead; IG ok.
- Gradual duration adds.
#2 Higher-for-longer
- Multiples pressured.
- Short duration + pricing power.
- Commodities/real assets help.
#3 Hard landing
- Growth stalls; spreads widen.
- Cut beta; add duration/long-vol.
- Watch liquidity.
#4 Rapid disinflation/pivot
- Duration rallies; beta rerisking.
- Growth rebounds.
- Reduce hedges as signals confirm.
FAQs
Isn’t this market timing?
No — it’s regime-aware risk management based on probabilities, not binary calls.
How does AI help?
Our ensemble blends macro features + market internals to detect shifts earlier and size risk accordingly.
What if scenarios conflict?
We size exposure to uncertainty. When signals disagree, we cut risk and wait for confirmation.
This article is educational and not investment advice. Investing involves risk, including loss of principal.