- German yield curve steepens, as inflation edges above ECB target
- Risk-free rates surge and euro credit spreads tighten
- Portfolio risk continues to fall, but at a slower rate than equity volatility
German yield curve steepens, as inflation edges above ECB target
Yields on long-dated German government bonds rose to their highest levels since early 2020 in the week ending April 30, as consumer-price growth in the country overshot both consensus expectations and the European Central Bank’s inflation target. The harmonised consumer price index was reported to have risen by 2.1% compared with the same month last year, and slightly above the ECB’s targeted price growth of 2%. The 10-year Bund benchmark climbed above -0.2% for the first time since January 2020 (not counting the sovereign-yield spike on March 19), expanding the term spread over the 2-year rate to more than 50 basis points, the widest it has been in almost two years.
Please refer to Figures 3 & 4 of the current Multi-Asset Class Risk Monitor (dated April 30, 2021) for further details.
Risk-free rates surge and euro credit spreads tighten
Risk premia on euro-denominated corporate bonds fell to their lowest levels in almost two years in the week ending April 30, 2021, as risk-free sovereign yields climbed to 15-month highs. High-quality EUR credit spreads have been strongly inversely related with German Bund yields throughout the coronavirus pandemic, currently showing a 60-day correlation of -0.77. This contrasts with lower-rated issuers, whose yield premia are now completely uncoupled from sovereign rates. The pronounced market movements during both the sell-off at the onset of the crisis and the subsequent recovery meant that share prices and credit spreads exhibited a strong inverse interaction through most of 2020 and the first few weeks of this year. However, the recent sideways movement of the latter, while the former continued their ascent, resulted in a much weaker relationship of between -0.2 and -0.3 now.
Please refer to Figures 1, 4 & 5 of the current Multi-Asset Class Risk Monitor (dated April 30, 2021) for further details.
Portfolio risk continues to fall, but at a slower rate than equity volatility
Short-term risk in Qontigo’s global multi-asset class model portfolio fell another 0.6% to 6.0% as of Friday, April 30, 2021, due to a further decline in standalone equity volatility. Yet, as we noted in our latest blog post If equity volatility is down, why isn’t multi-asset portfolio risk?, the recent ebbing in share-price fluctuations did not fully translate into an equally large drop in total portfolio risk. Rather, the decoupling of the interaction of stock and sovereign-bond returns meant that their formerly negative interaction no longer actively reduced overall predicted volatility. That said, holding fixed-income securities alongside equities still diversified total risk, thanks to their near-zero correlation with stock markets right now.
Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated April 30, 2021) for further details.