MAC Monitor — August 2, 2021

Multi-Asset Class Risk Monitor Highlights | Week Ended July 30, 2021

  • Economic worries continue to drive down bond yields
  • Bunds follow Treasuries higher despite surge in domestic inflation
  • Portfolio risk rises marginally, as higher bond contributions offset lower equity volatility

Economic worries continue to drive down bond yields

Sovereign yields continued to decline in the week ending July 30, 2021, amid intensifying concerns over the sustainability of global economic growth. The 10-year US Treasury benchmark ended the week 5 basis points in the red, as data from the US Department of Commerce on Thursday showed that the American economy had grown 6.5% in the second quarter—2 percentage points short of the consensus forecast of 8.5%. In a pre-emptive move a day earlier, the Federal Reserve had announced it would “ensure that monetary policy will continue to support the economy until the recovery is complete.” In the press conference following the FOMC meeting, Chair Jerome Powell stressed that the bank would continue to increase its holdings of Treasury and MBS securities at the current pace of at least $120bn per month.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated July 30, 2021) for further details.

Bunds follow Treasuries higher despite surge in domestic inflation

Prices of German government bonds edged higher across all maturities in the week ending July 30, 2021, despite a surge in the country’s inflation rate to its highest level in almost 13 years, as Bund yields followed their North American counterparts lower. The Federal Statistical Office reported on Thursday that the harmonized index of consumer prices rose 3.1% in the 12 months to July, slightly higher than the average analyst expectation of 2.9%. As a result, the 10-year breakeven rate—derived from the prices of inflation-linked securities relative to nominal Bunds—surged 11 basis points to 1.50%, pushing the corresponding real yield to an all-time low of -1.95%.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated July 30, 2021) for further details.

Portfolio risk rises marginally, as higher bond contributions offset lower equity volatility

Short-term risk in Qontigo’s global multi-asset class model portfolio rose marginally to 6.6% as of Friday, July 30, 2021, as the benefits of lower stock-market volatility were more than offset by higher risk contributions from non-US fixed-income securities. The latter reflected a less negative correlation between government-bond returns and exchange rates against the US dollar, as the greenback weakened against most of its major rivals last week, while sovereign yields declined. US investment-grade corporate and global high-yield securities, meanwhile, continued to actively reduce overall portfolio volatility, thanks to the ongoing inverse relationship of risk-free interest rates and credit spreads.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated July 30, 2021) for further details.