MAC Monitor — February 22, 2022

Multi-Asset Class Risk Monitor Highlights | Week Ended February 18, 2022

  • Russia-Ukraine tensions send bond market on a rollercoaster ride
  • Plummeting shares propel credit spreads to 15-month high
  • Safe-haven buying reduces portfolio risk

Russia-Ukraine tensions send bond market on rollercoaster ride

US Treasury yields continued to rollercoast in the week ending February 18, 2022, rocked by the conflict between Russia and Ukraine. The 10-year benchmark rate initially climbed 9 basis points on Monday and Tuesday, amid reports that Russian troops were purportedly withdrawing. But those gains were more than erased later in the week, when US officials, including President Joe Biden, insisted on Thursday that there was still a very high risk of an invasion. In the resulting flight-to-safety flows, the STOXX® USA 900 lost 2.2% in one of its worst trading days of the past 12 months, while long Treasury yields dropped 7 basis points. The rout continued on Friday, depressing share prices and sovereign rates by another -0.8% and -0.04%, respectively.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated February 18, 2022) for further details.

Plummeting shares propel credit spreads to 15-month high

Yield premia on USD-denominated high-quality corporate debt rose to their highest levels in 15 months in the week ending February 18, after two consecutive weeks of losses in the equity markets. The 5-year OAS of AA-rated securities over USD swaps climbed 5 basis points, taking the total year-to-date rise to 0.15%. Absolute spread increases were about three times bigger for lower quality issues, but stopped short of their previous peaks from late November and early December. According to ICE BofA fixed-income indices, USD investment-grade corporate bonds have lost 5.4% so far this year, whereas the corresponding high-yield benchmark is down only 4.3%, despite a much larger increase in credit-risk premia. The reason for the return difference was the higher coupon income of 0.8% for the latter, which offset part of the 5.1% decline in clean prices.

Please refer to Figure 5 of the current Multi-Asset Class Risk Monitor (dated February 18, 2022) for further details.

Safe-haven buying reduces portfolio risk

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio fell 0.4% to 10% as of Friday, February 18, 2022, as investors sought safe havens amid growing geopolitical tensions. Government bonds, gold, and the Japanese yen all rose together, offsetting losses in riskier assets, such as equities and corporate bonds. But it was oil that still provided the biggest risk reduction, despite a marginal decline in crude prices last week. Non-USD sovereigns, on the other hand, saw their share of overall portfolio volatility rise from 3.4% to 4.5%, as local price gains from lower yields were more than offset by exchange-rate losses, especially from the euro against the US dollar.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated February 18, 2022) for further details.