MAC Monitor — September 22, 2020

Multi-Asset Class Risk Monitor Highlights | Week Ended September 18, 2020

Sovereign yields diverge across the Atlantic; Yen surges on safe-haven buying; Portfolio risk rises for the second week in a row

Sovereign yields diverge across the Atlantic

Yields on high quality sovereign bonds diverged last week, with the yield on 10-year US Treasury bonds ending the week higher, as investors there sold bonds ahead of this week’s issuance of $155 billion in new notes and Fed Chair Powell’s testimony before Congress on Wednesday and Thursday. Conversely, a resurgence of Covid cases in the UK and Europe (Spain and France) spurred fears of new restrictions that would further stress an already fragile economic recovery. Investors there sought the safety of government bonds, driving down yields for both the Gilts and the Eurobonds, ahead of a live address by Boris Johnson detailing new Covid restrictions in the UK.

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Please refer to Figures 3 & 4 of the current Multi-Asset Class Risk Monitor (dated September 18, 2020) for further details.

Yen surges on safe-haven buying

Investors reacted to rising uncertainty by flocking to traditional safe havens, pushing the JPY sharply higher from its close the previous week. Increasing uncertainty, volatility, and a resurgence of infections in parts of Europe are driving investors home. Even the British pound retraced some of its losses from the previous week as domestic investors repatriated funds at home, converting them into GBP to buy Gilts until more clarity returns to markets. The USD/CHF, another safe-haven trade, also saw the Swiss franc strengthen against the greenback.

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Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated September 18, 2020) for further details.

Portfolio risk rises for the second week in a row

Short-term risk in Qontigo’s global multi-asset class model portfolio erased some of last week’s surge, declining 68 bps from 9.30% on September 11 to 8.62% at the end of last week. The decline in risk was entirely due to lower asset class volatility, with the portfolio experiencing a drop of 26 bps in cross-asset class diversification, as the negative correlation between equities and bonds continued to decline, while the positive correlation between equities and currency returns (against the USD) continued to rise. The biggest beneficiary of these changes was the US Equity allocation, which saw its contribution to portfolio risk decline the most, although it remains much larger than its weight in the portfolio would suggest.

Conversely, international developed and emerging market equities saw their risk contribution rise due to the positive correlation between their foreign currency returns and the equity asset class return. Despite this increase in contribution to portfolio risk, non-US developed equities still contributed less to portfolio risk than their weight would suggest. The 26 bps loss in cross-asset class diversification meant that for the second week in a row, all asset classes in the portfolio contributed positively to portfolio risk.

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Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated September 18, 2020) for further details.