MAC Monitor — April 19, 2021

Multi-Asset Class Risk Monitor Highlights | Week Ended April 16, 2021

  • US Treasury yields plummet, despite rising share prices and stronger inflation
  • Eurozone yields lifted by new supply
  • Portfolio risk increases, as stocks and bonds ascend in tandem

US Treasury yields plummet, despite rising share prices and stronger inflation

US Treasury yields fell sharply in the week ending April 16, 2021, a move that left many market participants somewhat puzzled. The 10-year benchmark rate plunged 11 basis points on Thursday in its biggest daily drop since early November, despite a combination of healthy corporate earnings, strong retail sales, and a bigger-than-expected drop in unemployment-benefit claims, which, in turn, fueled a surge in share prices. The downturn came on the heels of a 5-basis point decline two days earlier, when yields decreased despite a 2.6% rise in consumer prices in March, which was well above the Federal Reserve’s 2% target and also marginally higher than the consensus forecast of 2.5%. Strong inflation and rising stock markets are usually accompanied by falling bond prices—which move in the opposite direction of yields—as investors shift their funds into riskier, higher-yielding securities—so the relative market movements took many punters by surprise. Reasons given for the strong demand for sovereign debt included increasing concerns about possible side effects of some of the COVID vaccines and the latest sanctions against Russia. There were also reports of strong demand for US Treasuries from Asia, as the Federal Reserve reiterated its commitment to support financial markets.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated April 16, 2021) for further details.

Eurozone yields lifted by new supply

Eurozone bond yields rose in the week ending April 16, 2021, amid a flurry of new issues of long-dated sovereign debt. The 10-year German Bund benchmark climbed above -0.27% for the first time since late February, as bonds from Austria, Germany, Ireland, and Spain with maturities ranging from 15 to 50 years hit the market. This was in stark contrast to the US and the UK, where the same-maturity benchmark rates declined by 9 and 1 basis points, respectively. As result, the Treasury-Bund spread narrowed by 0.13% to 1.86%—the tightest it has been in five weeks.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated April 16, 2021) for further details.

Portfolio risk increases, as stocks and bonds ascend in tandem

Short-term risk in Qontigo’s global multi-asset class model portfolio rose slightly to 7.4% as of Friday, April 16, 2021, as benefits of lower equity volatility were once more outweighed by a stronger co-movement of equities with both bonds and foreign-exchange rates against the US dollar. The recent simultaneous rise of stock and sovereign-bond prices, especially in the United States, meant that US Treasuries and high-quality corporate bonds now actively increase portfolio risk. This contrasted with the high-yield category, however, where returns from changes in risk-free interest rates were still dampened by a zero correlation with credit spreads. The oil holding, meanwhile, recorded the biggest increase in its percentage risk contribution, almost tripling from 1.3% to 3.7%, due to a stronger interaction of equity and commodity returns.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated April 16, 2021) for further details.