- Sovereign yields plummet as traders slash interest-rate forecasts
- CoCo contagion sparks corporate-bond selloff
- Flight to quality reduces portfolio risk
Sovereign yields plummet as traders slash interest-rate forecasts
Short-term US Treasury yields plummeted to a 6-month low in the week ending March 17, 2023, with traders aggressively slashing their interest-rate expectations, as central banks on both sides of the Atlantic provided emergency funding to struggling banks in their jurisdictions. The monetary policy-sensitive 2-year rate recorded its sharpest drop in more than four decades on Monday, with the total week-on-week decline extending to 0.73%, as short-term interest-rate futures markets shaved off a similar amount from the anticipated peak of federal funds rates this year. The new pivot point around the 5% mark is now expected in May—brought forward from a July high of 5.6% priced in less than two weeks prior—while the year-end forecast was revised downward further to 3.88%. Market participants also changed their prediction for this week’s FOMC meeting to a three-in-four chance of a 25-basis point hike, with the remaining probability assigned to no change. This is in stark contrast to March 8, when futures prices implied a nearly 80% probability of a 0.5% increase.
Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated March 17, 2023) for further details.
CoCo contagion sparks corporate-bond selloff
Risk premia on high yield corporate securities soared to their widest levels since October last year in the week ending March 17, 2023, as investors tried to assess the impact of recent bank bailouts on subordinated creditors. Especially buyers of so-called additional tier one (AT1) debt—a special class of contingent convertible (“CoCo”) bonds designed to absorb losses in times of distress—were getting increasingly concerned that they could suffer disproportionately, as their claims could be written down to zero, whereas common shareholders might receive at least some compensation. Those considerations resulted in a reassessment of not only AT1 securities but lower-ranking and lower-rated debt in general.
Please refer to Figure 5 of the current Multi-Asset Class Risk Monitor (dated March 17, 2023) for further details.
Flight to quality reduces portfolio risk
The predicted short-term risk of Qontigo’s global multi-asset class model portfolio fell 1.1% to 7.8% as of Friday, March 17, 2023, as the effects of higher FX, equity, and interest-rate volatilities were more than offset by increasingly inverse relationships between the respective asset classes. Especially the flows from European stocks into the relative safety of sovereign debt accounted for most of the risk reduction, with non-US government bonds recording a 2.4% drop in their share of total portfolio volatility to 4.2%. Traditional safe havens like the Japanese yen and gold also saw their percentage risk contributions decline, with the price of the latter soaring 6.5% last week.
Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated March 17, 2023) for further details.