by Qontigo
Treasury curve continues to steepen, as Fed ups economic outlook; US yields outstrip Bunds amid widening growth forecasts; Portfolio risk declines, as equities and FX rates decouple once more
Treasury curve continues to steepen, as Fed ups economic outlook
Long-dated US sovereign yields continued to climb in the week ending March 19, 2021, extending the current upward streak to seven weeks. The 10-year benchmark rate surged another 10 basis points, taking the total gain since late January to 72 basis points, as the Federal Reserve Bank raised its 2021 growth forecast for the US economy to 6.5%—up sharply from its previous estimate of 4.2% at the end of last year. Core personal consumption expenditure inflation—the rate setter’s preferred measure of consumer-price growth—is now expected to rise to 2.2%, compared with only 1.8% predicted in December. Fed officials also pledged that they would leave interest rates at the current low levels until the United States reached full employment, i.e., until at least 2024. As a result, the monetary policy-sensitive 2-year yield remained anchored around 0.16%, as the 30-year/2-year term spread widened further to 239 basis points.
Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated March 19, 2021) for further details.
US yields outstrip Bunds amid widening growth forecasts
The gap between the 10-year US Treasury yield and the same-maturity German Bund benchmark expanded to 205 basis points in the week ending March 19, 2021, the widest it has been in almost 14 months. The increasing divergence in interest rates echoes the widening chasm in official economic growth projections. In its latest Economic Outlook report, published on March 9, the Organisation for Economic Co-operation and Development (OECD) raised its 2021 forecast for the United States by 3.3 percentage points to 6.5%—the same as the Federal Reserve’s expectation. Predicted real-GDP growth in the Eurozone, in contrast, stood at just 3.3%—up only marginally from the previous December outlook of 3.0%.
Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated March 19, 2021) for further details.
Portfolio risk declines, as equities and FX rates decouple once more
Short-term risk in Qontigo’s global multi-asset class model portfolio fell 1.1% to 8.4% as of Friday, March 19, 2021, due to a complete decoupling of share prices and exchange rates against the US dollar. As FX and stock markets have moved mostly sideways in the past few weeks, the correlation between the two has gone to zero. The recent range trading also meant a slight reduction in the standalone volatilities of both, which reduced predicted portfolio risk even further. In aggregate, the effect was most pronounced for non-US equities—developed and emerging-market—which saw their percentage risk contributions decrease by a total of -4.2%. Non-USD sovereigns and corporate bonds also benefitted from the dampened exchange-rate fluctuations.
Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated March 19, 2021) for further details.
