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MAC Monitor — January 29, 2024

Multi-Asset Class Risk Monitor Highlights | Week Ended January 26, 2024

  • Bund curve steepens over disinflation hopes
  • Persistent UK inflation puts question mark on early rate cuts
  • Lower FX and interest-rate volatility reduce portfolio risk

Bund curve steepens over disinflation hopes

The term spread between 10-year and 2-year Bund yields climbed to its least negative level in almost three months in the week ending January 26, 2024, after the European Central Bank signaled that inflation in the Eurozone continued to fall in line with its projections. Borrowing costs for the German government fell across all maturities, but the decline was most pronounced at the monetary policy-sensitive 2-year point, which eased by 9 basis points, as traders adjusted their year-end rate-cut expectations by a similar amount to nearly 1.5%. The 10-year benchmark rate also ended the week 3 basis points lower, as ifo Institut’s German business climate index unexpectedly dropped to its lowest level since May 2020, indicating that Europe’s biggest economy could remain stuck in recession for potentially another year.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated January 26, 2024) for further details:

Persistent UK inflation puts question mark on early rate cuts

British sovereign interest rates climbed to a six-week high in the week ending January 26, 2024, after stronger-than-expected inflation numbers the week before doused hopes on an early rate cut by the Bank of England. The Office for National Statistics reported on January 17 that consumer prices grew by 4% in the twelve months ending in December, up from 3.9% the month before and exceeding analyst predictions of 3.8%. Short-term interest-rate futures markets reacted by pricing out an entire 25-basis point rate cut, now expecting only one percentage point worth of monetary easing by the end of the year. This change also propagated further along the Gilt curve, with the 10-year rate breaking above the 4% mark for the first time since mid-December.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated January 26, 2024) for further details:

Lower FX and interest-rate volatility reduce portfolio risk

The predicted short-term risk of the Axioma global multi-asset class model portfolio dropped to 8.2% as of Friday, January 26, 2024, driven by a combined decline in FX and interest-rate volatility. Non-USD-denominated sovereign bonds were the biggest beneficiaries, as they saw their share of total portfolio risk shrink from 12.3% to 10.7%. US equities and oil, on the other hand, were the only two asset classes that experienced expansions in their risk contributions—both in absolute and relative terms—due to greater fluctuations in their respective prices.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated January 26, 2024) for further details: