MAC Monitor — May 24, 2021

Multi-Asset Class Risk Monitor Highlights | Week Ended May 21, 2021

  • Treasury yields seesaw over Fed minutes
  • Sterling climbs to 3-year high amid dollar weakness
  • Ebbing equity volatility reduces portfolio risk

Treasury yields seesaw over Fed minutes

US Treasury yields seesawed in the week ending May 21, 2021, surging on Wednesday before falling again the following day. The 10-year benchmark rate climbed 4 basis points, after the minutes from the latest Federal Open Market Committee meeting suggested that the central bank was considering withdrawing some of its monetary support, noting that a “number of participants suggested that if the economy continued to make rapid progress toward the committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.” But the tables turned the following day, when a drop in the 10-year breakeven inflation rate indicated that realized consumer-price growth could be near its peak, which would give the Federal Reserve more breathing room to maintain its accommodative stance for yet a while longer.

The stock market mirrored the movements, with prices falling on Wednesday and rebounding on Thursday, intensifying the recent co-movements of the two major asset classes.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated May 21, 2021) for further details.

Sterling climbs to 3-year high amid dollar weakness

The pound sterling rose to its highest level in more than three years in the week ending May 21, 2021, surpassing $1.42 for the first time since April 2018 on Tuesday, before settling at $1.450 over the following three days. The uptick was accompanied by a drop in predicted short-horizon volatility for the GBP/USD exchange rate to 8.5%—its lowest level since early March 2020. That said, the move was mainly driven by a broader dollar weakness, which also benefitted the euro, the Japanese yen, and the Swiss franc, than any specific UK-related developments.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated May 21, 2021) for further details.

Ebbing equity volatility reduces portfolio risk

Short-term risk in Qontigo’s global multi-asset class model portfolio was slightly lower at just over 8% as of Friday, May 21, 2021, thanks largely to an ebbing of stock-market volatility. The reduction was most notable in the non-US developed equity category, which derived an additional benefit from a lower covariance of share prices and exchange rates against the US dollar. Meanwhile, equity and bond returns remained positively correlated—both the interest-rate and credit-spread components—meaning that all fixed-income assets contributed positively to overall portfolio risk, while diversification benefits declined further. The British pound and the Japanese yen, on the other hand, remained decoupled from stock markets, resulting in near-zero risk contributions from the respective holdings.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated May 21, 2021) for further details.