MAC Monitor — February 9, 2021

Multi-Asset Class Risk Monitor | Week Ended February 5, 2021

Sovereign yields return to March peaks; Gilt curve shifts up, as traders discount negative rates; Portfolio risk rises on higher stock-market volatility

US Treasury yields climbed to their highest levels in almost 11 months in the week ending February 5, 2021, as share prices rose for five consecutive days to yet another all-time high, fueled by encouraging labor-market data and the prospect of a bipartisan stimulus deal. The 10-year benchmark rate surpassed 1.17% for the first time since its spike during the liquidity crisis in March 2020, while its British counterpart was elevated by optimistic central bank predictions. The very long end of the German Bund curve, meanwhile, moved into positive territory for the first time since early September.

In contrast, the risk premium between 10-year BTPs and same-maturity Bunds dropped to a 5-year low of just under 1%, following the appointment of former European Central Bank President Mario Draghi, now forming a new unity government in the hope of putting an end to recent political uncertainty.

Please refer to Figures 3 & 4 of the current Multi-Asset Class Risk Monitor (dated February 5, 2021) for further details.

Gilt curve shifts up, as traders discount negative rates

British Gilt yields rose across all maturities in the week ending February 5, 2021, following an upbeat economic assessment from the Bank of England. In its quarterly forecast, published on Thursday, the Monetary Policy Council said that it expected a rapid, vaccine-induced recovery in the second half of the year. Nevertheless, rate setters left the door open for negative rates, should the anticipated upswing disappoint, but at the same time qualifying that such steps could take at least six months to implement. Traders were quick to discount this possibility almost entirely, with only a very narrow segment around the 1-year point of the Gilt curve remaining marginally below zero.

The pound was also buoyed by these prospects, ending the week flat against the US dollar, while most of its other big competitors depreciated versus the strengthening greenback. The Norwegian krone was another notable exception, boosted by recovering oil prices.

Please refer to Figures 3 & 6 of the current Multi-Asset Class Risk Monitor (dated February 5, 2021) for further details.

Portfolio risk rises on higher stock-market volatility

Short-term risk in Qontigo’s global multi-asset class model portfolio rose slightly to 7.2% as of Friday, February 5, 2021, as a surge in share prices translated into a 2.5% uptick in equity standalone volatility. The latter alone would have added 1.25% to total portfolio risk, but a large part of the increase (0.9%) was offset, thanks to a reduced co-movement of share prices and exchange rates against the US dollar, as the latter strengthened alongside the stock market. Consequently, US Equities recorded the biggest rise in percentage risk contribution at nearly 8%, and now account for almost two thirds of overall portfolio volatility. For their non-US counterparts, on the other hand, any risk increase from higher share-price variation was counterbalanced by offsetting exchange-rate movements.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated February 5, 2021) for further details.