by Qontigo
- Hawkish Fed boosts short Treasury yields
- The Bank of England raises rates…and the pound drops (again)
- Recovering stock markets and currencies reduce portfolio risk
Hawkish Fed boosts short Treasury yields
Yields on short-dated US Treasury bonds soared to their highest levels since July 2007 in the week ending November 4, 2022, as Fed Chair Jay Powell hinted that interest rates may peak at a higher level than previously expected. The Federal Reserve raised its federal funds target by 0.75% on Wednesday—the fourth such ‘jumbo’ hike in a row—amid stubbornly high inflation and robust job gains. In the press conference following the FOMC meeting on Wednesday, Powell emphasized several times that monetary tightening still had “ways to go” and that “the ultimate level of interest rates will be higher than previously expected.” Stronger-than-expected payroll data released on Friday should also allow the Fed to concentrate solely on its mandate of maintaining price stability.
Borrowing rates rose across the entire maturity spectrum, but increases were most pronounced at the monetary policy-sensitive 2-year point, while the slower ascent of longer yields reflected the detrimental effect of tighter monetary conditions on long-term economic growth.
Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated November 4, 2022) for further details.
The Bank of England raises rates…and the pound drops (again)
The British pound depreciated 2.7% against the US dollar in the week ending November 4, 2022, as the Bank of England (BoE) mimicked the Federal Reserve by raising its policy rate by 75 basis points to 3%. Like its American counterpart, the BoE also noted that further rate increases “may be required for a sustainable return of inflation to target,” but then added that the ultimate peak could be “lower than priced into financial markets.” The Bank also released its latest quarterly monetary policy report, in which it predicted that GDP will “continue to fall throughout 2023 and 2024 H1, as high energy prices and materially tighter financial conditions weigh on spending.”
The drop in the pound’s value as interest rates rise is consistent with the pattern that has been prevalent since September last year. It reflects the expected adverse impact of higher borrowing costs on UK GDP growth and the notion that a recession will be the price the British economy has to pay for inflation to come down.
Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated November 4, 2022) for further details.
Recovering stock markets and currencies reduce portfolio risk
Predicted short-term risk in Qontigo’s global multi-asset class model portfolio dropped 1.8 percentage points to 17.1% as of Friday, November 4, 2022, as global stock markets recorded their first monthly gain in October, following two consecutive months of declines. Non-US developed and emerging-market equities saw their shares of total portfolio volatility decline by 0.7% and 0.9%, respectively, as higher share prices were boosted by stronger exchange rates against the US dollar, especially for the pound and the euro. Global high yield securities experienced the biggest drop in their percentage risk contribution from 4.8% to 2.9%, due to a decoupling of credit spreads and FX rates.
Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated November 4, 2022) for further details.
