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MAC Monitor — May 22, 2023

Multi-Asset Class Risk Monitor Highlights | Week Ended May 19, 2023

  • Short-term US Treasury bill yields drop over debt ceiling deal hopes
  • Returning risk appetites boost the dollar as investors move on from inflation concerns
  • Opposing share prices and FX rates reduce portfolio risk

Short-term US Treasury bill yields drop over debt ceiling deal hopes

The yield on 1-month US Treasury bills dropped 17 basis points to 5.62% in the week ending May 19, 2023, amid hopes that policymakers in Washington will agree to raise the debt ceiling before the expiration of the June 1 deadline. Federal Reserve Chair Jerome Powell contributed to the downward pressure by stating at a conference on Friday that the central bank’s “policy rate may not need to rise as much as it would have otherwise to achieve our goals.” That being said, the nervousness did not seem to abate completely, as 4-week debt instruments still traded more than half a percentage point above the effective federal funds rate at which commercial banks lend their excess reserves to each other overnight. Furthermore, the 2-month yield soared 0.4% to 5.27%—its highest level in two weeks. Medium and long Treasury yields also climbed between 12 and 33 basis points, although this appeared to be more a reflection of returning risk appetites and rising share prices.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated May 19, 2023) for further details.

Returning risk appetites boost the dollar as investors move on from inflation concerns

The US dollar appreciated 0.5% against a basket of foreign trading partners in the week ending May 19, 2023, as hopes of lower central bank rates and a potential resolution of the debt ceiling crisis propelled the STOXX® USA 900 index to heights last seen in August 2022. Exchange-rate gains were most pronounced against the Japanese yen, which plummeted to its weakest level against its American rival in nearly six months. The renewed positive correlation between share prices and the value of the greenback marks a significant shift in investor focus away from inflation concerns to the prospect of easing monetary conditions.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated May 19, 2023) for further details.

Opposing share prices and FX rates reduce portfolio risk

The predicted short-term risk of Qontigo’s global multi-asset class model portfolio declined another 0.6% to 5% as of May 19, 2023, as a countermovement of share prices and exchange rates against the USD made non-US stocks appear less positively correlated with their American counterparts. On the flipside, the combination of falling bond prices and weakening currencies more than quintupled the percentage risk contribution of non-USD denominated sovereign debt from 0.6% to 3.2%. US equities, meanwhile, experienced the biggest compression in their share of overall portfolio volatility from 59.9% to 52.6%, as they benefited from an inverse interaction with both FX and interest rate returns.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated May 19, 2023) for further details.