MAC Monitor — March 2, 2021

Multi-Asset Class Risk Monitor | Week Ended February 26, 2021

Stock and bond prices both fall over inflation concerns; Dollar strengthens as rates rise; Portfolio risk ebbs despite joint stock-bond sell-off

Stock and bond prices both fall over inflation concerns

Stock and bond prices around the world dropped in unison in the week ending February 26, 2021, as intensifying inflation concerns propelled the 10-year US Treasury benchmark above 1.50% for the first time in over 12 months. The upward shift was even more pronounced in the “belly” of the curve (4 to 7-year maturities), where yields rose by up to 20 basis points, following the lukewarm reception of $62bn worth of new supply in 7-year notes. Rising rates are considered bad news for so-called “growth” stocks, which are expected to receive most of their cash flows in the future. When discount rates are high, the present values of those distant earnings are lower, reducing the corresponding share prices accordingly.

Please refer to Figures 3 & 4 of the current Multi-Asset Class Risk Monitor (dated February 26, 2021) for further details.

Dollar strengthens as rates rise

The US dollar appreciated 0.6% against a basket of foreign currencies in the week ending February 26, 2021, as bond traders raised their interest-rate expectations amid ongoing inflation concerns. Higher yields in a country or region can make it more attractive to foreign investors, benefitting the local currency. The dollar strengthening was, therefore, wide-ranging across all major currencies, except for the euro and the Danish krone, which both ended the week flat against the dollar. The Japanese yen and the Swiss franc, on the other hand, each lost around 1%, with the biggest decline of around 2% recorded for the Norwegian krone, which faced additional downward pressure from a sharp drop in the oil price on Friday.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated February 26, 2021) for further details.

Portfolio risk ebbs despite joint stock-bond sell-off

Short-term risk in Qontigo’s global multi-asset class model portfolio fell 0.6% to 6.7% as of Friday, February 26, 2021, thanks to a further drop in equity volatility. That said, part of the benefit was offset by the recent simultaneous sell-off at the stock and bond markets, which meant that US Treasuries and investment-grade corporate bonds once more added to overall portfolio risk. There was still some diversification to be had, though, by investing in non-USD denominated securities. The frequent reversals of the interactions between share prices and exchange rates led to a complete decoupling of the two. The effect was most notable for developed non-US equities, which now contribute to total portfolio risk only marginally more than their market-value weight of 15%. This contrasts with US stocks, whose share of overall volatility is more than twice their percentage weight.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated February 26, 2021) for further details.