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MAC Monitor — January 23, 2023

Multi-Asset Class Risk Monitor Highlights | Week Ended January 20, 2023

  • Yields see-saw over mixed economic data and central-bank comments
  • Yen plummets as BoJ defies markets by leaving yield cap in place
  • Decoupling stock and bond prices reduce portfolio risk

Yields see-saw over mixed economic data and central-bank comments

Global sovereign yields took a rollercoaster ride in the week ending January 20, 2023, as traders balanced weak economic data with hawkish comments from central bankers. Long-term Treasury rates plummeted to a 4-month low on Wednesday, following bigger-than-expected drops in US retail sales and manufacturing output. However, yields rebounded later in the week when rate setters on both sides of the Atlantic doused hopes of an impending ‘pivot’ in monetary policy, instead reaffirming their commitment to bringing consumer-price growth under control. European Central Bank President Christine Lagarde and Federal Reserve Vice Chair Lael Brainard both stressed their determination “to stay the course” to get inflation back down to its 2% target.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated January 20, 2023) for further details.

Yen plummets as BoJ defies markets by leaving yield cap in place

The Japanese yen plummeted 2% against the US dollar in the week ending January 20, 2023, as the Bank of Japan (BoJ) defied market pressure and kept its yield curve control (YCC) measures in place. The central bank had surprised markets a month earlier by expanding the corridor within which it allows the 10-year JGB yield to fluctuate around its 0% target from 25 to 50 basis points either side. Borrowing rates continued to rise and the yen strengthened substantially after the decision, in anticipation that the BoJ would eventually altogether lift the cap on bond yields. Instead, the bank left its YCC policy in place and kept its benchmark rate at 0.1%.

Please refer to Figures 4 & 6 of the current Multi-Asset Class Risk Monitor (dated January 20, 2023) for further details.

Decoupling stock and bond prices reduce portfolio risk

The predicted short-term risk of Qontigo’s global multi-asset class model portfolio fell 0.8% to 11.9% as of Friday, January 20, 2023, as stock and bond markets reacted differently to last week’s economic news. Share prices fell on Tuesday on the back of reports that retail sales and manufacturing output in the United States had fallen more than predicted by analysts. This was in contrast to fixed income investors who interpreted the data as a potential reason for central bankers to slow down the pace of monetary tightening. Yields fell as a result, and bond prices rose. The lower correlation between the two major asset classes predominantly benefitted the sovereign and high-quality corporate securities in the portfolio, which saw their combined share of total portfolio risk fall by almost two percentage points.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated January 20, 2023) for further details.