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MAC Monitor — October 24, 2023

Multi-Asset Class Risk Monitor Highlights | Week Ended October 20, 2023

  • Rising inflation expectations propel Treasury yields to 16-year highs
  • Euro credit risk premia widen amid economic growth concerns
  • Mostly positive cross-asset correlations leave little room for portfolio diversification

Rising inflation expectations propel Treasury yields to 16-year highs

A rise in long-term inflation expectations propelled US Treasury yields to another 16-year high in the week ending October 20, 2023. The 10-year borrowing rate approached 5%—a level last seen in July 2007—as the corresponding breakeven inflation rate climbed above 2.4% for the first time since March this year in the wake of stronger-than-expected consumer-price growth in September. That being said, our recent analysis of real returns showed that historically, long-term US sovereign debt has roughly yielded two times expected inflation. With the breakeven inflation rate just under 2.5% at present, the current nominal yield therefore appears appropriate. But risks remain that investors could raise their inflation expectations further in case of another upward surprise in consumer prices in coming months, forcing the Federal Reserve to revisit its current projections and tighten monetary conditions even more.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated October 20, 2023) for further details.

Euro credit risk premia widen amid economic growth concerns

Risk premia on European credit securities expanded to their widest levels since March’s banking crisis in the week ending October 20, 2023. The recent surge in spreads of investment grade corporate bonds, which started in mid-September, has been driven by growing concerns about the region’s economic prospects, mirroring a 5-week losing streak for the EURO STOXX 50® equity benchmark, as the two markets remained highly correlated. High yield issuers also saw their borrowing costs increase, but spreads remained below more recent peaks.

The simultaneous rise in risk-free rates and credit spreads means that corporate borrowers are hit from both sides, and the current positive stock-bond correlation is likely to amplify this going forward.

Please refer to Figure 5 of the current Multi-Asset Class Risk Monitor (dated October 20, 2023) for further details.

Mostly positive cross-asset correlations leave little room for portfolio diversification

The predicted short-term risk of Axioma’s global multi-asset class model portfolio stood at 10% as of Friday, October 20, 2023, as mostly positive cross-asset correlations left little room for diversification. Ongoing concerns about persistent inflation and higher-for-longer central bank rates weighed on stock and bond markets in equal measure, with corporate securities being hit particularly hard, as losses from higher risk-free rates were amplified by wider credit spreads. Oil and gold were notable exceptions, as the prices of the two commodities decoupled from all other asset classes amid the concerns caused by the recent tensions in Israel.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated October 20, 2023) for further details.