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MAC Monitor — November 1, 2021

Multi-Asset Class Risk Monitor Highlights | Week Ended October 29, 2021

  • Long Gilt yields drop, as the DMO slashes issuance projections
  • ECB tries to quell rate-hike expectations—but short Bund yields still rise
  • Lower equity volatility reduces portfolio risk

Long Gilt yields drop, as the DMO slashes issuance projections

The term premium between long- and short-dated Gilts shrank to its narrowest margin since the start of the year in the week ending October 29, 2021, as the UK Treasury slashed its debt projections for the 2021/22 fiscal year, based on more optimistic economic-growth and tax forecasts. The 10-year benchmark yield dropped 12 basis points in its biggest daily fall since March 2020, after the Debt Management Office announced that it expected total issuance for the year to amount to £198.4bn—down £57.8bn compared with its previous estimate from last April. The monetary policy-sensitive 2-year rate, in contrast, ended the week slightly higher at 0.65%, with overnight index swap rates implying over 100 basis points worth of Bank of England rate hikes over the same horizon.

Please refer to Figures 3 & 6 of the current Multi-Asset Class Risk Monitor (dated October 29, 2021) for further details.

ECB tries to quell rate-hike expectations—but short Bund yields still rise

Short-dated German Bund yields climbed to their highest levels since January 2020, as inflation continued to surge across the entire euro area, prompting traders to raise their bets on a European Central Bank rate hike within the next 10 months. The 2-year Schatz benchmark rose 6 basis points to -0.59%, despite efforts from European Central Bank President Christine Lagarde to quell market expectations of an imminent tightening of monetary conditions. At the press conference following Thursday’s governing council meeting, Lagarde acknowledged that “inflation will take longer to decline than previously expected” but insisted that “a moderately lower pace of net asset purchases” would be sufficient to keep consumer prices in check, thus eliminating the need to adjust interest rates.

Please refer to Figures 3 & 6 of the current Multi-Asset Class Risk Monitor (dated October 29, 2021) for further details.

Lower equity volatility reduces portfolio risk

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio dropped 0.9% to 7.2% as of Friday, October 29, 2021, as the standalone standard deviation of equity returns fell 1.3 percentage points. Emerging-market equities experienced the largest decline in their share of overall portfolio volatility from 6.0% to 4.8%—less than their monetary weight of 5%—thanks to a decline in their relative riskiness versus their developed counterparts. The risk contributions of most other asset classes, meanwhile, remained largely unchanged, as cross-asset correlations remained relatively stable.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated October 29, 2021) for further details.