MAC Monitor — November 8, 2021

Multi-Asset Class Risk Monitor Highlights | Week Ended November 5, 2021

  • Gilt yields and pound plummet, as Bank of England surprises traders
  • US and European sovereign yields follow suit, despite Fed tapering
  • Increased diversification reduces portfolio risk

Gilt yields and pound plummet, as Bank of England surprises traders

British government yields recorded their biggest weekly drop since the onset of the COVID crisis in March 2020, in the week ending November 5, 2021. The fall off followed the Bank of England’s announcement on Thursday that it would hold its base rate at 0.10%. The decision caught traders off guard, as most expected an increase of 15 basis points to be a slam dunk. Sterling overnight index average (SONIA) forward rates adjusted immediately, plummeting 0.15% for maturities of up to three months. The rate hike is now expected in February, when the bank will release its next quarterly monetary policy report, which will include the latest projections for inflation and economic growth. In the past, the Monetary Policy Council has typically announced interest-rate changes in February, May, August, or November. The 2-year point of the Gilt curve exhibited the biggest decline of 33 basis points, while the 10-year benchmark fell 0.21%. The pound also weakened by around 1.5% against both the euro and the dollar.

Please refer to Figures 3, 4 & 6 of the current Multi-Asset Class Risk Monitor (dated November 5, 2021) for further details.

US and European sovereign yields follow suit, despite Fed tapering

Yields on American and European sovereign debt fell to their lowest levels in six weeks, tracking their British counterparts. The surprise decision from the Bank of England not to tighten monetary conditions provided support for the European Central Bank’s more dovish stance, with German borrowing rates dropping more than 0.20% around the 5-year point of the Bund curve. Benefits were even greater for peripheral issuers—such as Spain, Greece, and Italy—which saw their 10-year financing costs decline by between 23 and 28 basis points.

Yield decreases were less pronounced in the United States, where the Federal Reserve held firm to its tightening course, confirming after its monthly meeting on Wednesday that it would start scaling back its $120bn-a-month asset purchases this month. However, the decision had been widely anticipated, so the 10-year Treasury rate rose only 3 basis points following the announcement, still ending the week 0.10% in the red.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated November 5, 2021) for further details.

Increased diversification reduces portfolio risk

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio fell another 0.8% to 6.4% as of Friday, November 5, 2021, as a decoupling of FX and equity returns substantially expanded diversification benefits. This significantly decreased the standalone volatility (in USD terms) of non-US equities. Both developed and emerging-market stocks saw their 60-day return standard deviation drop by 1.2 percentage points. Non-USD fixed-income securities also benefited from this effect, although to a much lesser extent, due to their renewed co-movement with local stock markets. Index-linked government bonds are currently the riskiest debt instruments in the portfolio—adding more to overall portfolio volatility than their monetary weight—as much of the recent rise in sovereign yields had been driven by increases in breakeven inflation rates.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated November 5, 2021) for further details.