MAC Monitor — February 14, 2022

Multi-Asset Class Risk Monitor Highlights | Week Ended February 11, 2022

  • Treasury yields vacillate, as geopolitical concerns offset higher inflation and central-bank rates
  • British stocks, Gilt yields, and the pound all rise together
  • Lower equity and FX volatility reduce portfolio risk

Treasury yields vacillate, as geopolitical concerns offset higher inflation and central-bank rates

US Treasury yields roller-coasted in the week ending February 11, 2022, lifted at first by higher-than-expected inflation and hawkish remarks from central-bank officials, and then dampened by growing geopolitical concerns over a potential escalation of the standoff between Russia and Ukraine.

The 10-year benchmark rate soared 9 basis points on Thursday, following a report that US consumer prices had risen 7.5% in the 12 months ending January—the fastest pace in nearly four decades and surpassing consensus expectations of 7.3%. James Bullard, president of the St. Louis Fed, escalated the upward pressure on bond yields by suggesting that the Federal Open Market Committee should raise its target rate by a full percentage point over its next three meetings. Short-term interest-rate (STIR) futures traders reacted by temporarily increasing the implied probability of a 50-basis point hike in March to 94%, according to the CME FedWatch Tool.

However, these moves reverted somewhat on Friday, when warnings from Western politicians and security experts that Russian troops could invade Ukraine in a matter of days triggered flight-to-quality flows from risky equities into the relative safety of government debt. Long Treasury yields dropped 11 basis points, while STIR futures now assign an even chance to a rate hike of either 0.25% or 0.50%.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated February 11, 2022) for further details.

British stocks, Gilt yields, and the pound all rise together

The British pound appreciated 0.5% against the US dollar in the week ending February 11, 2022, as the UK stock market outperformed its American rival. The STOXX® UK 180 blue-chip index rose 1.8%—compared with a loss of 1.5% for the STOXX® USA 900—as surging commodity prices and rising interest rates and bond yields boosted the values of energy, mining, and financial companies. These three industries combined constitute about one third of the UK 180’s market capitalization—more than twice their share of 15% in the USA 900. The latter is dominated by tech companies, which account for about 30% of its return, but represent only 2% of the UK market. Given the recent underperformance of tech and growth stocks as central banks turned increasingly hawkish, the return divergence of the two benchmarks does not seem surprising and is, if anything, likely to widen further, as monetary conditions get tighter as the year progresses.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated February 11, 2022) for further details.

Lower equity and FX volatility reduce portfolio risk

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio plunged almost one percentage point to 10.4% as of Friday, February 11, 2022. Most of the decrease was due to a simultaneous decline in equity and FX-rate volatility, whereas cross-asset class correlations remained largely stable at their current low levels. This meant that majority of the risk reduction occurred in the equity buckets, while the remaining categories were little changed. The generally weak interactions between the different security types also meant that the largest part of overall volatility (84%) came from the equity half of the portfolio. Holding oil slightly reduced total risk, as the price of the commodity kept rising for the eighth week in a row.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated February 11, 2022) for further details.