MAC Monitor — January 10, 2022

Multi-Asset Class Risk Monitor Highlights | Week Ended January 7, 2022

  • Yields surge as traders bump up rate-hike expectations
  • German inflation hits 29-year high, but long-term expectations remain stable
  • Renewed co-movement of stocks and bonds offsets lower equity volatility

Yields surge as traders bump up rate-hike expectations

Long-term US Treasury yields jumped 27 basis points in the week ending January 7, 2022, the biggest weekly surge since September 2019, when rates were lifted by rising optimism over an upcoming trade deal between China and the United States. About half of the increase occurred on Monday—the first trading day of the new year—but the Federal Reserve minutes released on Wednesday provided additional upward pressure, as traders revised their monetary-policy expectations. The transcript from December’s FOMC meeting confirmed that members fully supported the accelerated winding down of emergency asset purchases by mid-March, which could pave the way for an earlier rate hike. In fact, the rate setters explicitly noted that “it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated.” Short-term interest-rate futures markets reacted by raising the implied probability of a March rate hike to 76%, compared with only 54% a week earlier.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated January 7, 2022) for further details.

German inflation hits 29-year high, but long-term expectations remain stable

The German 10-year borrowing rate reached its highest level since May 2019 on Friday, January 7, 2022—just 4 basis points short of becoming positive once more—as Europe’s biggest economy was expected to have experienced its biggest yearly inflation in almost three decades. A preliminary estimate released on Thursday indicated that German consumer prices rose 5.3% in 2021, up from 5.2% in November and slightly beating the consensus forecast of 5.1%. The greatest upward pressure stemmed from soaring energy costs (+18.3%), which would still be consistent with the central-bank narrative of base effects and transitory distortions. Accordingly, long-term inflation expectations remained largely unchanged, with the 10-year Bund breakeven rate holding steady around 1.85%.

Please refer to Figures 3 & 4 of the current Multi-Asset Class Risk Monitor (dated January 7, 2022) for further details.

Renewed co-movement of stocks and bonds offsets lower equity volatility

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio rose slightly to 7.5% as of Friday, January 7, 2022, as the benefits of lower equity volatility were more than offset by a renewed co-movement of stock and bond markets. This affected mostly the fixed-income assets, which saw their combined share of overall portfolio risk rise by almost 10 percentage points. The risk contributions from sovereign and high quality USD-denominated corporate bonds all turned positive once more, leaving JPY cash the only holding in the portfolio to still marginally reduce overall volatility. Meanwhile, a weaker correlation of share and crude prices meant that the percentage risk contribution from oil almost halved from 9.2% to 4.7%.

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