MAC Monitor — July 18, 2022

Multi-Asset Class Risk Monitor Highlights | Week Ended July 15, 2022

  • US Treasury curve (partly) inverts over inflation and rate-hike concerns
  • Higher rates and recession fears boost dollar to euro parity
  • Flight-to-safety flows reduce portfolio risk

US Treasury curve (partly) inverts over inflation and rate-hike concerns

The differential between long and short US Treasury yields fell to its lowest level since 2000 in the week ending July 15, 2022, amid rising concerns of what the persistently high inflation and the accompanying central-bank response could mean for economic growth. Data from the Bureau of Labor Statistics showed on Wednesday that American consumer prices had risen 9.1% in the 12 months to June—up from 8.6% the previous month and beating the consensus forecast of 8.8%. This prompted short-term interest-rate traders to (temporarily) raise their rate-hike expectation for the upcoming FOMC meeting on July 26-27 from 75 basis points to a full percentage point. This, in turn, lifted the monetary policy-sensitive 2-year yield by 10 basis points to 3.13%, while the 10-year benchmark—which is more driven by long-term economic-growth and inflation expectations—dropped 5 basis points to 2.91%, resulting in a term premium of -0.22%. This indicates that market participants expect the tighter monetary policy to eventually stabilize consumer prices, but that there could also be a detrimental impact on the overall economy.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated July 15, 2022) for further details.

Higher rates and recession fears boost dollar to euro parity

The Dollar Index—a measure of the USD’s value against a basket of major trading partners—climbed to its highest level in almost 20 years in the week ending July 15, 2022, lifted by a combination of higher short-term US interest rates and rising worries over global economic growth. The dollar strengthening caused the euro to briefly trade below $1 intraday on Wednesday and Thursday for the first time since the end of 2002. The Japanese yen, meanwhile, recorded the biggest weekly loss among the G10 currencies, reflecting the Bank of Japan’s ongoing commitment to ultra-low interest rates and bond yields.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated July 15, 2022) for further details.

Flight-to-safety flows reduce portfolio risk

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio dropped to 15.5% as of Friday, July 15, 2022, compared with 19.9% three weeks earlier. The decrease was due to a combination of lower standalone equity volatility and the recent flight-to-safety flows from stocks into long-dated sovereign bonds, which once more led to the two asset classes moving in opposite directions. This benefitted mostly the debt instruments in the portfolio, with their share of overall volatility falling by almost 5 percentage points to 24.6%. Non-US developed equities, on the other hand, saw their percentage risk contribution rise from 17.2% to 18.8%, as local market losses were amplified by simultaneous currency depreciations against the US dollar.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated July 15, 2022) for further details.