by Qontigo
- Treasury yields ease over debt-ceiling compromise
- Sticky inflation and Bank of England rate-hike speculations boost the pound
- US stock-market gains reduce portfolio risk
Treasury yields ease over debt-ceiling compromise
Short-term US Treasury yields eased to their lowest level in a month in the week ending June 2, 2023, as lawmakers in Washington agreed on a deal to raise the maximum amount the federal government can borrow by issuing bonds—the so-called ‘debt ceiling’—for another two years. The 4-week T-bill rate, which had previously climbed above 6% over fears of a potential technical default, dropped to 5.28% in response, yielding only 20 basis points more than federal funds. The relief also propagated across the rest of the yield curve, with the 10-year benchmark falling 0.11% to just under 3.7%.
This was in contrast to short-term interest-rate (STIR) markets, where traders significantly raised their monetary-policy expectations for the end of the year, no longer expecting the Federal Reserve to lower its target corridor from its current level of 5-5.25%. This constituted a significant change compared with only four weeks ago, when STIR futures implied an effective rate below 4.5% for December, reflecting concerns that the Fed might keep rates higher for longer in light of the latest labor market reports. Non-farm payrolls released on Friday reported that 339,000 new jobs had been created in May, surpassing average analyst predictions of 190,000.
Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated June 2, 2023) for further details.
Sticky inflation and Bank of England rate-hike speculations boost the pound
The pound sterling gained 1.2% against the US dollar in the week ending June 2, 2023, amid speculation that the Bank of England could raise its policy rate to 5.5% by the end of the year—around 40 basis points above the projected US effective federal funds rate. Even though UK consumer price inflation had fallen to below double digits in April, month-on-month changes in both headline and core inflation were much higher than anticipated. Especially the core index, which excludes more volatile components such as energy, food, alcoholic beverages, and tobacco, rose by 1.3% from March to April—almost twice the consensus forecast of 0.7% and nearly eight times the average monthly rate of 0.17% required for annual growth to revert to the 2% central bank target.
Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated June 2, 2023) for further details.
US stock-market gains reduce portfolio risk
The predicted short-term risk of Qontigo’s global multi-asset class model portfolio fell to 5.8% as of Friday, June 2, 2023, compared with 6.3% the week before. Most of the risk reduction was driven by lower equity volatility, as the US stock market posted a third consecutive weekly gain. However, the biggest impact was recorded for non-US equities, which saw their share of total portfolio volatility shrink from 26% to 22.9%, due to a complete decoupling of local share prices and exchange rates against the USD. This was in contrast to non-USD-denominated sovereign bonds, where FX and interest-rate returns remained positively correlated, resulting in a 2.6 percentage point increase in their risk contribution to 8.2%.
Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated June 2, 2023) for further details.
