- Fed officials signaling rate cuts puts pressure on Treasury yields
- Lower interest rates weigh on the dollar
- Cross-asset rally raises correlations and portfolio risk
Fed officials signaling rate cuts puts pressure on Treasury yields
US Treasury yields plummeted across all maturities to their lowest levels since late July in the week ending December 15, 2023, as Federal Reserve officials signaled that they expected interest rates to fall over the course of next year. The so-called ‘dot plot’, published after the FOMC meeting on Wednesday, showed that 11 of the 19 committee members anticipated that the federal funds rate target will be lowered by 75 basis points or more from its current level of 5.25-5.50% by the end of 2024. This compares to only five rate setters who shared that assessment in the last forecast round in September. Short-term interest-rates futures markets went even further, pricing in at least 1.25% worth of rate cuts. Yet, with inflation projected to still average 2.4% in 2024 and to only reach the 2% target in 2026, a predicted federal funds rate of 4% appears to be on the low side, unless market participants also anticipate a significant cooling off in labor-market and economic-growth conditions.
Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated December 15, 2023) for further details.
Lower interest rates weigh on the dollar
The US dollar lost 1.4% against a basket of major trading partners in the week ending December 15, 2023, as traders once more upped the implied probability of a March rate cut to almost 70%, compared with only 45% the week before. The euro and the pound each climbed to 4-month highs against their American rival on Thursday, after the governors of both the European Central Bank and the Bank of England pushed back against too aggressive rate-cut speculations following their respective council meetings. The BoE meeting minutes even showed that three of the eight MPC members preferred to increase the base rate by 25 basis points. The Japanese yen also appreciated 2% against the greenback, extending its total gains since mid-November to 7%. The Bank of Japan is the only major central bank that has yet to tighten monetary conditions in the current cycle, with market participants speculating that it could lift its negative rate policy at some point early next year.
Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated December 15, 2023) for further details.
Cross-asset rally raises correlations and portfolio risk
The predicted short-term risk of the Axioma global multi-asset class model portfolio soared 3.2 percentage points to 12% as of Friday, December 15, 2023, as stocks, bonds, and currencies all rallied together, fueled by the prospect of more relaxed monetary conditions. Non-USD-denominated government debt experienced the biggest expansion in its share of total portfolio risk from 8.5% to 10.6%, as local price returns appeared more correlated with stock markets and were further amplified by FX-rate gains. Corporate bonds also recorded increased volatility with tighter spreads adding to the profits from lower risk-free rates.
Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated December 15, 2023) for further details.