The Reserve Bank of Australia might be forced to break its promise and lift rates as soon as next year, if credit markets are right.
Interest rate traders are betting that our central bank will increase the cash rate to 0.25 basis points in late 2022 from its record low levels of 0.1% currently.
What's more, these traders think interest rates will be at least 0.5% the following year, reported the Australian Financial Review.
Interest rate traders playing chicken with the RBA
That runs contrary to RBA Governor Philip Lowe's commitment to keep rates at record lows until 2024, if not later.
Inflation fears are driving credit investors to undertake one of the boldest trades on the market – to bet against the central bank.
ASX investors should pay heed as interest rate expectations can derail the extremely popular investment in high-growth tech stocks.
ASX shares most at risk to rising interest rates
You only need to look at the meteoric rise of the Afterpay Ltd (ASX: APT) share price and Zip Co Ltd (ASX: Z1P) share price to see what I mean.
Such shares are more sensitive to rising rates than other parts of the share market as their valuations are highly leveraged to bond yields. More specifically, it's the 10-year government bond yield that's the focus as it sets the "risk-free" benchmark that risk assets are priced against.
While all shares would be impacted as the risk-free rate and valuations move in opposite directions, value stocks won't be hit as hard as they haven't run up as much.
Dividend paying stocks are also better protected as their generous distributions give investors a reason to stay onside.
Share allocation and interest rates
This means ASX shares like the National Australia Bank Ltd. (ASX: NAB) share price and Telstra Corporation Ltd (ASX: TLS) share price would fare better than the tech darlings as rates rise.
Meanwhile, other ASX shares could prove to be a good hedge against rising rates because their earnings increase with inflation.
These include our big resource companies, like the BHP Group Ltd (ASX: BHP) share price, OZ Minerals Limited (ASX: OZL) share price and Santos Ltd (ASX: STO) share price. Rates and commodity prices typically move in the same direction.
Investors, mind your head!
What's prompting the credit market to forecast a rate hike are inflation worries. The mass COVID-19 vaccination programs rolling out around the world are fuelling speculation of a strong economic rebound.
The US president's plan to stuff US$2 trillion into the pockets of Americans is also forcing inflation-fearing investors to scramble for cover.
Sure, credit markets could be wrong about the RBA. But given that the spike in bond yields are evident around the world, this is one risk you can't afford to take your eyes off.
