MAC Monitor — March 29, 2022

Multi-Asset Class Risk Monitor Highlights | Week Ended March 25, 2022

  • Inflation weighs on European stock and bond prices
  • Hawkish Fed inverts part of US Treasury curve
  • Lower factor volatility reduces portfolio risk, as correlations remain stable

Inflation weighs on European stock and bond prices

European stock and bond prices fell in tandem in the week ending March 25, 2022, as long-term borrowing costs for German government debt soared to their highest level since October 2018, with the STOXX® Europe 600 falling -0.1%. A simultaneous decline of both asset classes is usually a sign of rising inflation concerns, fueled by persistently high energy and raw-material costs. This was also reflected in a 0.17% increase in the 10-year Eurozone breakeven-inflation rate to 2.55% — well above the European Central Bank’s 2% target. December Euribor futures reacted accordingly, now implying a central-bank deposit rate of 0.25%, thus pricing in 75 basis points worth of rate hikes before the end of the year.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated March 25, 2022) for further details.

Hawkish Fed inverts part of US Treasury curve

Medium-term US Treasury yields outstripped longer maturities in the week ending March 25, 2022, buoyed by hawkish signals from the Federal Reserve Bank. The 5-year benchmark rate soared 43 basis points to 2.55% — compared with a 10-year yield of 2.48% — following remarks by Fed Chair Jerome Powell that there was “an obvious need to move expeditiously to return the stance of monetary policy to a more neutral level.” This was interpreted as an indication that the Federal Open Market Committee might raise its target-rate corridor by 50 basis points at its next meeting on May 3-4. The implied probability of such a move rose from 44% to 73%, according to the Chicago Mercantile Exchange’s FedWatch Tool, which also predicts a nearly 90% likelihood that the federal funds target corridor will be at least 275-300 basis points by the middle of next year. With the 20-year yield currently at 2.74%, there is the possibility of a curve inversion, which in the past has frequently been the precursor of a recession.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated March 25, 2022) for further details.

Lower factor volatility reduces portfolio risk, as correlations remain stable

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio dropped 1.7% to 14% as of Friday, March 25, 2022, due to a reduction in standalone equity and FX-rate volatility. Developed non-US stocks were the biggest beneficiaries, seeing their share of overall portfolio risk drop by half a percentage point to 21.6%. Correlations between risk factors, meanwhile, remained mostly stable, resulting in little alteration in the risk contributions of most other asset classes.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated March 25, 2022) for further details.