MAC Monitor — February 28, 2022

Multi-Asset Class Risk Monitor Highlights | Week Ended February 25, 2022

  • Inflation angst sends sovereign yields up, despite Ukraine crisis
  • Geopolitical tensions boost dollar and commodity currencies
  • Higher FX and equity volatility raise portfolio risk

Inflation angst sends sovereign yields up, despite Ukraine crisis

Government-bond yields around the world rose in the week ending February 25, 2022, as worries over rising inflation eclipsed geopolitical concerns. Flight-to-safety flows, triggered by Russian troops entering Ukraine on Thursday, depressed borrowing rates only temporarily, as the impact of surging energy and commodity prices took center stage once more. The 10-year US Treasury breakeven rate—a market gauge for long-term inflation expectations—climbed 0.12%, boosting the same-maturity nominal rate by 5 basis points in its wake.

The Federal Reserve is still expected to raise its target-rate corridor at its next meeting in mid-March, although implied probabilities remained skewed toward a smaller step, i.e., a 75% chance of a 25-basis point raise. Short-term interest-rate traders in the UK, meanwhile, priced out an entire 0.25% hike by the end of the year, with the Bank of England’s base rate now expected to peak at 2% in 2023.

Please refer to Figures 3 & 4 of the current Multi-Asset Class Risk Monitor (dated February 25, 2022) for further details.

Geopolitical tensions boost dollar and commodity currencies

The US dollar gained 0.6% against a basket of major trading partners in the week ending February 25, 2022, as rising geopolitical tensions drew global investors into the relative safety of the world’s biggest reserve currency. The euro and the British pound were hit particularly hard, due to their greater exposure to Russia, with predicted short-horizon volatility for the EUR/USD exchange rate surging above 6% for the first time since May 2021. In contrast, commodity currencies, including the Australian and New Zealand dollars, were boosted by soaring prices of raw materials. The Norwegian krone was among the biggest winners, gaining more than 1.5% against the greenback, as the price of European Brent crude briefly cracked the $100-per-barrel mark for the first time since 2014.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated February 25, 2022) for further details.

Higher FX and equity volatility raise portfolio risk

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio soared 1.5 percentage points to 11.5% as of Friday, February 25, 2022, as geopolitical uncertainty raised the volatilities of foreign-exchange and stock markets alike. As a result, non-USD equities—developed and emerging markets—saw their combined share of overall risk soar by 9%. Shares and sovereign bonds, meanwhile, remained largely uncoupled amid the conflicting forces of surging commodity and consumer prices on one side and flight-to-safety flows on the other. As a result, US Treasuries neither added to nor subtracted from total portfolio volatility. The continued ascent of oil and gold prices, however, meant that the two commodities actively reduced overall risk. High-yield bonds, on the other hand, were hit by a double blow of rising risk-free yields and expanding credit spreads, raising their percentage risk contribution from 2.1% to 2.5%.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated February 25, 2022) for further details.