Sovereign yields rise as optimism increases; Pound surges on last-minute Brexit deal; Portfolio risk drops further, but remains above pre-crisis levels
Sovereign yields rise as optimism increases
Global sovereign yields rose slightly in the three weeks ending December 31, 2020, buoyed by an array of positive news across the various regions. The 10-year US Treasury rate ended the year just under 1%—up half a percentage point from the all-time low in early March—following the long-awaited agreement of a $900bn stimulus package. That said, long-term yields remain around 100 basis points lower than at the start of the year, thanks to aggressive rate cuts by the Federal Reserve during the worst of the market turbulence in March.
Rate setters on the other side of the Atlantic, in contrast, had much less room to maneuver, as rates there were already close to or below zero. Consequently, yield fluctuations in the Eurozone and the UK were much less pronounced, with 10-year Bund and Gilt yields meandering in tighter ranges of 40-60 basis points. Peripheral Eurozone issuers, meanwhile, were among the biggest beneficiaries of the reinstated bond-buying program from the European Central Bank. Italian and Greek government bonds saw their risk premia over German Bunds decline by 1.12% and 1.25%, respectively, compared with the start of the year, and by 190 and 325 basis points, respectively, from the March peaks.
Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated December 31, 2020) for further details.
Pound surges on last-minute Brexit deal
The pound sterling gained 3.5% against the US dollar in the three weeks ending December 31, 2020, as the UK and the European Union agreed on a comprehensive trade deal, with just seven days to spare before the end of the Brexit transition deadline. The British currency ended the year at $1.37—its highest level both for 2020 and since April 2018—which constituted a year-on-year gain of more than 3%. Predicted short-horizon volatility for GBP/USD rose to 9.8%, which is more than 2 percentage points higher than at the start of the year, but still 2.4% lower than the 12.2% observed over the spring and summer.
The euro also climbed to a 32-month high of around $1.23—up 9% from the previous year-end. The move was part of a wider weakening of the dollar, as the greenback has lost 12.5% against a basket of major trading partners since the peak of the COVID crisis in March. The strong depreciation of the latter could be seen as sign of increasing risk appetites, as US share prices resurged almost 70% from their March lows.
Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated December 31, 2020) for further details.
Portfolio risk drops further, but remains above pre-crisis levels
Short-term risk in Qontigo’s global multi-asset class model portfolio dropped to 8.2% as of Thursday, December 31, 2020, compared with 10.2% three weeks earlier. Yet, despite a steep decrease from a peak of more than 45% in late March, predicted volatility remains at twice its pre-crisis level of 4.1%. As in previous weeks, the latest decline was primarily due to lower equity volatility, which dropped by another 4 percentage points to 11.4%. The decrease in overall risk was, therefore, mostly reflected in the equity categories. That said, global equities still accounted for 76% of total portfolio volatility, compared with a monetary weight of 50%. In contrast, safe-haven assets, such as US Treasury bonds and the Japanese yen, neither added to nor subtracted from overall risk, as they remained uncorrelated to share prices.
Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated December 31, 2020) for further details.