MAC Monitor — January 11, 2021

Multi-Asset Class Risk Monitor Highlights | Week Ended January 8, 2021

Treasury yields surge ahead of expected fiscal stimulus; Regional sovereign bonds diverge on inflation outlook; Increased diversification mutes portfolio risk

Treasury yields surge ahead of expected fiscal stimulus

Long-term US Treasury yields surged about 20 basis points in the week ending January 8, 2021, as the anticipation of fiscal stimulus measures raised expectations of stronger consumer-price growth. The short end of the curve, in contrast, was held in place by the ultra-low central-bank rates, resulting in a so-call bear steepening. The 10-year benchmark crept above 1% for the first time in 10 months, as inflation expectations—implied by the price differences between nominal and index-linked government bonds—rose above 2% for the first time since the middle of 2019. The Democratic Party’s victory in the Georgia senatorial election, which will give the incoming presidential administration control over both houses of Congress, raised expectations that President-elect Joe Biden will expand the current $900bn rescue package. The violent protests in Washington on Wednesday and worse-than-expected labor-market data on Friday, meanwhile, seemed to have had no detrimental impact on financial markets.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated January 8, 2021) for further details.

Regional sovereign bonds diverge on inflation outlook

The differential between US and Eurozone benchmark yields expanded to its widest level since early March in the week ending January 8, 2021. The 10-year Treasury-Bund spread rose to 166 basis points—a level last seen before the Federal Reserve started cutting rates in response to the COVID crisis on March 3, 2020—as the corresponding gap in breakeven inflation rates widened to a 6.5-year high of 1.08% on Wednesday. Yield premia on riskier assets, meanwhile, continued to fall, with sub-investment grade spreads tightening to levels last seen in early March. The yield pickup of Italian BTPs over German Bunds declined to a 5-year low of 106 basis points.

Please refer to Figures 4 & 5 of the current Multi-Asset Class Risk Monitor (dated January 8, 2021) for further details.

Increased diversification mutes portfolio risk

Short-term risk in Qontigo’s global multi-asset class model portfolio fell 0.3% to 7.9% as of Friday, January 8, 2021, as a rise in equity volatility was more than offset by a more inverse relationship between stocks and bonds and a weaker correlation of share prices and FX rates. That said, equities still accounted for almost 80% of total portfolio volatility, but the offsetting price movements of both sovereign and investment-grade corporate bonds resulted in a notable risk reduction. Non-US fixed-income securities, as well as the EUR and GBP cash holdings, also saw their share of overall risk decline, as their exchange rates against the US dollar no longer moved in line with stock markets. High-yield securities, in contrast, remained highly correlated with the latter, as credit spreads tightened alongside rising share prices, resulting in positive risk contributions.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated January 8, 2021) for further details.