MAC Monitor — February 15, 2021

Multi-Asset Class Risk Monitor | Week Ended February 12, 2021

Treasury curve steepens, as Fed shrugs off rising inflation expectations

Long-dated US Treasury yields returned to pre-crisis levels in the week ending February 12, 2021, as inflation expectations continued to rise. The short end of the curve, meanwhile, was held firmly in place by assurances from the Federal Reserve Bank that it would maintain its “patiently accommodative monetary policy” stance. Speaking at the Economic Club of New York on Wednesday, Chairman Jay Powell stressed once again that the central bank was prepared to tolerate “inflation moderately above 2 percent for some time” in order to achieve its revised aim of “inflation that averages 2 percent over time”. Subsequently, the 30-year benchmark rate climbed above 2% for the first time in 12 months, raising the 30-year/2-year spread to a 4-year high of 190 basis points.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated February 12, 2021) for further details.

Italian yield premium drops, as political risk fades

Yields on Italian government bonds dropped to a historical record low of 0.48% in the week ending February 12, 2021, after former European Central Bank President Mario Draghi was appointed as the country’s new prime minister and formed a national unity government, backed by most major parties. At the same time, the accompanying rise in risk appetites—also reflected in a 1.1% gain in the STOXX® Europe 600 index—lifted the 10-year Bund benchmark rate to its highest level since September of last year. As a result, the risk premium of same-maturity Italian BTPs over their German counterparts narrowed to 92 basis points—its tightest since December 2015.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated February 12, 2021) for further details.

Portfolio risk rises despite lower equity volatility

Short-term risk in Qontigo’s global multi-asset class model portfolio rose 0.6% to 7.8% as of Friday, February 12, 2021, as the benefits of lower equity volatility were offset by a renewed reversal of their interaction with exchange rates. The recent weakening of the US dollar meant that foreign currencies appreciated alongside share prices, which made non-USD-denominated asset seem more correlated with the US stock market. This was most notable for non-US sovereign and investment corporate bonds, which saw their percentage risk contributions flip from -0.9% and -0.1% to +1.6% and +1.8%, respectively. Their US equivalents, on the other hand, continued to reduce overall portfolio volatility, thanks to the ongoing inverse relationship of equity and interest-rate returns.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated February 12, 2021) for further details.