MAC Monitor — March 22, 2022

Multi-Asset Class Risk Monitor Highlights | Week Ended March 18, 2022

  • Bank of England raises rates, but Gilt yields tumble
  • Investors abandon safe havens as equity markets recover
  • Stock market recovery lifts portfolio risk

Bank of England raises rates, but Gilt yields tumble

Yields on British government bonds tumbled across all maturities in the week ending March 18, 2022, despite the Bank of England raising its base rate from 0.5% to 0.75% at its monthly meeting on Thursday. The monetary policy-sensitive 2-year yield slumped 25 basis points, as traders adjusted their rate-hike expectations downward. The Monetary Policy Meeting minutes showed that all four members who had been in favor of a 50-basis point increase last month opted for a more moderate raise of 0.25% this time, with one rate setter even voting to leave policy unchanged. That said, short-term interest-rate markets still expect the BoE base rate to climb to 2.25% by the middle of 2023. With long Gilt yields just below 1.8%, this could portend the risk of a curve inversion, which might, in turn, signal the onset of an economic recession.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated March 18, 2022) for further details.

Investors abandon safe havens as equity markets recover

Traditional safe-haven currencies depreciated in the week ending March 18, 2022, as equity markets recouped the losses incurred since the Russian invasion of Ukraine on February 24. The STOXX® USA 900 and the STOXX® Europe 600 gained 6.6% and 5.6%, respectively, in their strongest weekly rallies since the announcement of the first COVID vaccines in early November 2020. The US dollar, which tends to strengthen in times of geopolitical uncertainty, depreciated 0.9% against a basket of foreign currencies, after having gained more than 3% since the start of the conflict. Losses were even more pronounced for the Japanese yen, which gave up an additional 1.8% against its American rival.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated March 18, 2022) for further details.

Stock market recovery lifts portfolio risk

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio soared by another 3.4% to 15.7% as of Friday, March 18, 2022. The strong stock-market recovery raised standalone equity volatility by around 5% for developed economies and about twice that amount in emerging markets. With bond markets on either side of the Atlantic reacting differently to last week’s monetary-policy decisions—yields rose in the US and fell in the UK—they remained largely uncoupled from share prices, with US Treasuries neither adding to nor subtracting from overall portfolio risk. The positive contribution from non-US sovereign debt, on the other hand, was mostly driven by the increased co-movement of equity returns and exchange rates against the US dollar.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated March 18, 2022) for further details.