MAC Monitor — February 23, 2021

Multi-Asset Class Risk Monitor | Week Ended February 19, 2021

Inflation concerns drive sell-off of long treasuries; Pound surges on vaccination success and rising rate expectations; Portfolio risk falls, as equity volatility continues to slide

Inflation concerns drive sell-off of long treasuries

Prices of long-dated government bonds declined for the third week in a row in the week ending February 19, 2021, as investors continued to fret over potential adverse impacts on consumer-price growth from the anticipated $1.9tn fiscal stimulus plan. Long US Treasury yields climbed above levels last seen 12 months ago, but the short end remained firmly in place, with maturities up to four years staying within the Federal Reserve’s target corridor of 0-0.25%. This led to a further steepening of the risk-free yield curve, as the 30-year/2-year term spread climbed above 200 basis points for the first time since February 2017.

Yield increases were even more pronounced in the United Kingdom, where the 10-year Gilt benchmark surged 18 basis points to over 0.70%, as traders further discounted the possibility of negative interest rates. That said, in contrast to its US counterpart, the UK bellwether rate stalled several basis points short of the peak reached at the height of the liquidity crisis in mid-March last year.

Please refer to Figures 3 & 4 of the current Multi-Asset Class Risk Monitor (dated February 19, 2021) for further details.

Pound surges on vaccination success and rising rate expectations

The pound sterling climbed to a 34-month high in the week ending February 19, 2021, as the country’s quick rollout of coronavirus vaccines spurred hopes of a faster economic recovery and led to a further upward revision of interest-rate expectations. The British currency surpassed $1.40 for the first time since April 2018, taking total gains since last March’s low of $1.15 to 22%—compared with 13% for the euro and 5% for the yen over the same period. Predicted volatility for GBP/USD, meanwhile, dropped to 9.2%—a level not seen since mid-March. Still, the pound remained the second-riskiest developed currency in Europe, topped only by the Norwegian krone, which has staged an impressive, oil-price fueled comeback of 34% since March.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated February 19, 2021) for further details.

Portfolio risk falls, as equity volatility continues to slide

Short-term risk in Qontigo’s global multi-asset class model portfolio fell 0.5% to 7.3% as of Friday, February 19, 2021, primarily driven by a further decline in stock-market volatility. The impact was most visible for US and emerging-market equities, which saw their combined share of overall portfolio risk drop by 2.5 percentage points. The risk reduction was, however, considerably more muted for non-US developed stocks, where returns were dampened by uncorrelated FX rates. In contrast, non-USD government bonds experienced a significant increase in their percentage risk contribution, due to the newly raised fluctuation of long-term sovereign yields.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated February 19, 2021) for further details.