by Qontigo
- US downgrade propels Treasury yields to 10-month highs
- The Bank of England raises rates…and the pound drops
- Portfolio risk rebounds amid share-price and exchange-rate losses
US downgrade propels Treasury yields to 10-month highs
US Treasury yields climbed to their highest levels in almost ten months in the week ending August 4, 2023, following an announcement from the federal government that it would increase its borrowing in order to reduce the widening gap between tax revenues and fiscal spending. The 10-year benchmark rate climbed above 4.1% for the first time since last November, boosted by a notice from rating agency Fitch that it downgraded the United States’ creditworthiness from AAA to AA+.
However, part of the surge in long yields was reversed on Friday, when the non-farm payroll report for July showed that the US economy added 187,000 jobs last month, which was fewer than the average analyst projection of 200,000. The monetary policy-sensitive 2-year yield even ended the week 10 basis points in the red, as a cooling labor market was seen as confirmation that the Federal Reserve may have tightened monetary conditions sufficiently to bring inflation under control.
Please refer to Figures 3 & 4 of the current Multi-Asset Class Risk Monitor (dated August 4, 2023) for further details.
The Bank of England raises rates…and the pound drops
The British pound dropped to a 4-week low in the week ending August 4, 2023, despite the Bank of England raising its base rate for the fourteenth time in a row to 5.25%, while leaving the door open for further monetary tightening. Yet, short Gilt yields and swap rates retreated to levels last seen in mid-June, with Sterling Overnight Index Average (SONIA) forward rates dropping below 5.75% from anticipated peaks of over 6.5% only four weeks prior.
Sterling’s depreciation was part of a wider strengthening of the greenback against all other G10 currencies apart from the Norwegian krone.
Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated August 4, 2023) for further details.
Portfolio risk rebounds amid share-price and exchange-rate losses
The predicted short-term risk of Qontigo’s global multi-asset class model portfolio rebounded to 9.7% as of Friday, August 4, 2023, from 8.4% a week earlier. The surge in volatility was caused by a combination of stronger fluctuations in share prices and a more intense co-movement with FX rates, as the STOXX® USA 900 blue-chip index recorded its biggest weekly drawdown since March this year. But it was non-US equities (developed and emerging markets) that accounted for nearly half of the overall risk increase, as local losses were amplified by weaker exchange rates against the US dollar, making them the riskiest asset class in the portfolio relative to their monetary weight.
Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated August 4, 2023) for further details.
