MAC Monitor — October 5, 2021

Multi-Asset Class Risk Monitor Highlights | Week Ended October 1, 2021

  • Persistent inflation and rate-rise fears keep pushing yields higher
  • Stagflation specter spooks sterling
  • Perfect storm of positive correlations boosts portfolio risk

Persistent inflation and rate-rise fears keep pushing yields higher

Global sovereign yields recorded their sixth consecutive weekly rise in the week ending October 1, 2021, driven by continued strong growth in consumer prices and the anticipation of increasingly tighter monetary policy. The 10-year US Treasury rate posted a three-month high, as core personal consumption expenditures—the Federal Reserve’s preferred measure of inflation—exhibited a 3.6% year-on-year increase for the third month in a row in August. On Tuesday, Fed Chair Jerome Powell told Congress that the effects on prices from supply bottlenecks and hiring difficulties could “prove to be greater and more enduring than anticipated, posing upside risks to inflation.” Yield rises were most pronounced in the United Kingdom, where the 10-year Gilt benchmark surged 10 basis points, closing above 1% for the first time since May 2019 and taking the total increase since the most recent lows at beginning of August to 0.45%.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated October 1, 2021) for further details.

Stagflation specter spooks sterling

The British pound dropped to its lowest level since the start of the year against the US dollar, as a combination of rising consumer prices and supply-chain disruptions stirred fears of so-called ‘stagflation’—a term for the amalgamation of economic stagnation and inflation first coined during the oil crisis of the 1970s. Fuel shortages at petrol stations over the past week and a half brought to light a general lack of lorry drivers that hints at much wider supply-chain problems, which could threaten the UK’s budding recovery from the COVID pandemic. That said, the pound’s weakness was shared with other major currencies, including the euro, Swiss franc, and Japanese yen. This, in turn, propelled the Dollar Index to its highest value in more than a year.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated October 1, 2021) for further details.

Perfect storm of positive correlations boosts portfolio risk

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio surged 2 percentage points to 8.8% as of Friday, October 1, 2021, boosted by a perfect storm of plummeting share prices, soaring yields, and weakening exchange rates against the US dollar. The combination of these effects raised the percentage risk contribution of non-US sovereign bonds by 2.1% to 6.4%. A simultaneous increase in credit spreads—especially for lower-rated securities—also meant that USD corporate bonds no longer reduced overall portfolio risk. The oil holding, in contrast, saw its share of total volatility plummet from 5.7% to 1.8%, as crude prices closed at their highest levels in almost three years, thus bucking the trend of most other asset classes in the portfolio.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated October 1, 2021) for further details.