by Qontigo
- Long-term borrowing rates reach 15-year highs as real yields approach 2%
- Pound holds firm amid persistent inflationary pressures
- Continued stock and bond market losses raise portfolio risk
Long-term borrowing rates reach 15-year highs as real yields approach 2%
Long-term borrowing costs for the British and American governments climbed to their highest levels in 15 years in the week ending August 18, 2023, amid expectations that the respective central banks could keep interest rates higher for longer than anticipated. On Thursday, the 10-year US Treasury and UK Gilt benchmarks closed above 4.3% and 4.6%, respectively, for the first time since August 2008.
That being said, even though 10-year yields above 4% appear high in light of the past decade and a half of ultra-loose monetary policy, the current levels seem appropriate when considering real yields. Since at least the 1980s, US nominal yields have on average been twice the expected rate of inflation. If the expectation is that inflation will eventually return to 2% over the long term, then real yields should also be around 2%. With the 10-year US Treasury breakeven inflation rate currently standing at 2.3%, a nominal 10-year yield of 4.3% therefore seems fitting. One could say that Treasury yields are simply returning to their natural equilibrium.
Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated August 18, 2023) for further details.
Pound holds firm amid persistent inflationary pressures
The British pound held firm against a strengthening US dollar in the week ending August 18, 2023, as traders once more upped their expectations for the Bank of England base rate from a peak of 5.75% to 6%, amid reports of persistent inflationary pressures in the UK economy. The Office of National Statistics reported on Wednesday that headline consumer prices had fallen in the month of July, taking the annual growth rate down to 6.8%, compared with 7.9% in the 12 months to June. However, the decline was mostly driven by falling gas and electricity prices, whereas the core index, which excludes more volatile components, such as energy and food costs, rose by 0.3% month-on-month. The latter is nearly twice the average monthly rate required for annual growth to revert to the 2% central bank target, indicating that underlying inflationary pressures remain high. This notion was confirmed by UK wages (excluding bonuses) growing at a record pace of 7.8% per annum over the second quarter of 2023.
Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated August 18, 2023) for further details.
Continued stock and bond market losses raise portfolio risk
The predicted short-term risk of Qontigo’s global multi-asset class model portfolio resurged to 9% as of Friday, August 18, 2023, compared with 7.9% the week before. The increase was predominantly driven by soaring equity volatility, as global stock markets extended their recent losing streak to a third consecutive week. This was exacerbated by the simultaneous rise in bond yields, which intensified the co-movement between the two major asset classes. US equities took the brunt of the rise in overall volatility, with their percentage risk contribution expanding by 1.6% to 40.4%. This was in contrast to their counterparts in other developed markets, which saw their share of total portfolio risk shrink from 24.5% to 23.3%, due to lower fluctuations in exchange rates against the USD.
Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated August 18, 2023) for further details.
