by Qontigo
- Dollar and Treasury yields rise as rate setters up their monetary policy projections
- Bank of England breaks hiking cycle after downward inflation surprise
- Combined stock-bond sell-off boosts portfolio risk
Dollar and Treasury yields rise as rate setters up their monetary policy projections
Short-dated US Treasury yields climbed to their highest levels in 17 years while the US dollar strengthened to a 6-month high in the week ending September 22, 2023, amid indications that the Federal Reserve could tighten monetary conditions once more before the end of the year. Following its two-day meeting on September 19-20, the Federal Open Market Committee (FOMC) left its policy target unchanged at 5.25-5.50% in line with market expectations. But individual projections from rate setters—the so-called ‘dot plot’—showed that a majority of FOMC members considered it more likely than not that they would “raise rates one more time in the two remaining meetings this year.“ There is also an expectation that rates will remain higher for longer than previously anticipated. At the beginning of September, short-term interest-rate futures had implied that the Fed would have lowered its policy target to 5.00-5.25% by May next year, whereas current predictions are 25 basis points higher.
Please refer to Figures 3, 4 & 6 of the current Multi-Asset Class Risk Monitor (dated September 22, 2023) for further details.
Bank of England breaks hiking cycle after downward inflation surprise
The Bank of England (BoE) held interest rates steady for the first time since the start of its hiking cycle in December 2021 last week, sending the pound tumbling to a six-month low against the US dollar. Thursday’s knife-edge decision not to raise rates again—with four MPC members still in favor of further tightening and five against it—followed the release of weaker-than-expected inflation a day earlier. UK headline inflation fell from 6.8% in July to 6.7% in August, while many economists had predicted a rise to 7%. More importantly, core prices, which exclude energy, food, alcohol and tobacco, rose by only 0.16% month-on-month, significantly undershooting the consensus forecast of 0.6%. If price growth were to continue at this current pace, core inflation would be back at the 2% target by May next year.
Bond markets took this as encouraging news, and short-term interest-rate forward markets now indicate no further rate hikes from the Bank of England, thereby also sending 2-year Gilt yields to their lowest levels since early June.
Please refer to Figures 3, 4 & 6 of the current Multi-Asset Class Risk Monitor (dated September 22, 2023) for further details.
Combined stock-bond sell-off boosts portfolio risk
The predicted short-term risk of Qontigo’s global multi-asset class model portfolio rebounded from 7.4% to 8% as of Friday, September 22, 2023, driven by a combination of higher equity volatility and a stronger co-movement of stock and bond prices, as concerns over tighter monetary conditions sent both asset classes into a simultaneous tailspin. US equities took the brunt of the risk increase, with their share of total portfolio volatility soaring from 40.4% to 45.6%. This was in contrast to their counterparts in other developed countries, which experienced a 2.3% drop in their percentage risk contribution, as the adverse effect stronger share price fluctuations was more than offset by a drop in FX volatility. The latter also benefitted non-US sovereign bonds, which saw their share of total portfolio risk shrink by a similar amount.
Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated September 22, 2023) for further details.
