MAC Monitor — December 6, 2021

Multi-Asset Class Risk Monitor Highlights | Week Ended December 3, 2021

  • Treasury curve flattens amid mixed monetary and economic signals
  • Flight to quality boosts safe-haven currencies
  • Higher stock-market volatility raises portfolio risk

Treasury curve flattens amid mixed monetary and economic signals

The term spread between long and short-dated US Treasuries shrank to its narrowest margin in more than 12 months in the week ending December 3, 2021, as each component of the yield curve reacted differently to recent news. The monetary policy-sensitive 2-year rate climbed by a total of 11 basis points between Tuesday and Thursday, after Fed Chair Jerome Powell signaled that he would support an accelerated reduction in the central bank’s asset purchases, despite rising concerns over the new Omicron variant. A speedier conclusion of quantitative easing could pave the way for an earlier rise in interest rates. The 10-year benchmark, in contrast, plummeted almost 20 basis points, as concerns over the economic impact of Omicron weighed on share prices and sovereign yields alike. A weaker-than-expected non-farm payroll report added further downward pressure on Friday.

Please refer to Figures 3 & 4 of the current Multi-Asset Class Risk Monitor (dated December 3, 2021) for further details.

Flight to quality boosts safe-haven currencies

Safe-haven currencies, such as the Swiss franc, the Japanese yen, and the US dollar, were in high demand in the week ending December 3, 2021, as investors jettisoned risky assets amid worries over surging coronavirus cases and the reintroduction of lockdown measures. Commodity currencies, including the Australian dollar, the New Zealand dollar, and the Norwegian krone, were hit particularly hard, depreciating between 1% and 1.5% against the USD. Predicted short-horizon volatility for the British pound climbed above 7.35% for the first time since early September, as the GBP/USD exchange rate fell to its lowest level in almost a year.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated December 3, 2021) for further details.

Higher stock-market volatility raises portfolio risk

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio climbed another 0.7% to 7.4% as of Friday, December 3, 2021, driven by a surge in standalone equity volatility from 8.8% to 12.7%. The effect was most pronounced for US equities, which saw their share of overall portfolio risk soar by almost 16 percentage points to 52.4%. Oil also experienced an eight-fold increase in its percentage risk contribution, from 1.1% to 8.8%, as crude prices plummeted along with stock prices. Foreign-exchange rates, in contrast, remained largely decoupled from share prices, so that non-US stocks (developed and emerging-markets) added much less to total portfolio risk than their American counterparts. On the flipside, the ongoing flight-to-safety flows meant that interest-rate returns were once again inversely related to stock-market losses, reducing risk contributions across all fixed-income holdings.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated November 26, 2021) for further details.