- After a turbulent week, Treasury yields remain mostly unchanged
- Pound falls and Gilt curve flattens, as UK growth misses BoE projection
- Portfolio risk falls further, as equity volatility continues to decline
After a turbulent week, Treasury yields remain mostly unchanged
Long US Treasury yields were mostly flat in the week ending August 13, 2021, after rising in the first two days, but surrendering most of their gains on Friday. The 10-year benchmark rate climbed 6 basis points on Monday and Tuesday, following independent comments from two Federal Reserve officials that the central bank may have already achieved its objective of 2% inflation over the longer run and that it could start tightening monetary conditions as early as Q4 this year. On the other hand, Wednesday’s release of US consumer price growth for July—which came in at 5.4% year-on-year for the second consecutive month—had little impact on either bond or stock markets. But Treasury yields plunged 5 basis points on Friday, after the University of Michigan’s index of consumer confidence dropped to levels below those seen in the early days of the pandemic last year. The report attributed the gloomy assessment to respondents’ reasoning that “the economy’s performance will be diminished over the next several months” and “dashed hopes that the pandemic would soon end”.
Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated August 13, 2021) for further details.
Pound falls and Gilt curve flattens, as UK growth misses BoE projection
The British pound fell 0.1% against the US dollar and 0.4% against the euro in the week ending August 13, 2021, as the country’s GDP growth rate of 4.8% for the second quarter of 2021 came in just below the Bank of England’s most recent projection of 5%. The United Kingdom also lags other major industrialized nations in terms of economic recovery. Since the end of 2019, the absolute UK gross-domestic product is still down 4.4%, compared with the Eurozone average of -3.3% and a gain of +3.3% in the United States.
Long Gilt yields also ended the week 4 basis points lower, reducing the 10-year/2-year term spread to 0.48%, as the short end of the curve remained anchored at previous Friday’s levels.
Please refer to Figures 3 & 6 of the current Multi-Asset Class Risk Monitor (dated August 13, 2021) for further details.
Portfolio risk falls further, as equity volatility continues to decline
Short-term risk in Qontigo’s global multi-asset class model portfolio fell another 0.4% to 5.1% as of Friday, August 13, 2021, due to a further decline in equity volatility and a less-pronounced co-movement of share prices and foreign-exchange rates against the US dollar. On the flipside, FX returns were now slightly positively correlated with sovereign-bond prices, resulting in a positive interaction of US Treasuries and non-US stocks. This meant that non-US equities saw their share of overall portfolio risk decrease by only 2 percentage points to 26%, while their US counterparts experienced an 8% drop to 36%. In contrast, USD-denominated investment-grade corporate bonds once more contributed positively to total portfolio volatility, as their risk seemed to be once again primarily driven by interest rates rather than credit spreads.
Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated August 13, 2021) for further details.