MAC Monitor — January 24, 2022

Multi-Asset Class Risk Monitor | Week Ended January 21, 2022

  • Renewed surge in UK inflation boosts short Gilt yields
  • Flight-to-quality offsets tighter monetary policy, keeping long sovereign yields flat
  • Portfolio risk soars, as stock and bond prices tumble

Renewed surge in UK inflation boosts short Gilt yields

British Gilt yields surged to their highest levels in about three years in the week ending January 21, 2022, as UK costs of living grew at their fastest rate in nearly three decades. The Office of National Statistics announced on Wednesday that consumer prices rose 5.4% in the 12 months ending December, surpassing the consensus forecast of 5.2%. The renewed acceleration—up from 5.1% in the previous month—puts yet more pressure on the Bank of England (BoE) to deal with the ongoing quandary of a tight labor market and rising input costs, which could, in turn, lead to higher wages and lower earnings for corporations. Yield increases were most pronounced at the 1-year and 2-year points, which both surged around 10 basis points, with traders now expecting the BoE base rate to peak at 1.50% in mid-2023. Longer-dated borrowing rates, meanwhile, were essentially unchanged, as investors sought the relative safety of sovereign debt amid tumbling stock prices.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated January 21, 2022) for further details.

Flight-to-quality offsets tighter monetary policy, keeping long sovereign yields flat

Long-dated sovereign yields ended last week near the levels of the previous Friday, as flight-to-safety flows offset the effects of tighter monetary-policy expectations. The 10-year US benchmark rate got off to a flying start after the long bank-holiday weekend, jumping 10 basis points on Tuesday, amid speculation that the Federal Reserve could raise its fed funds target even more aggressively than expected in the light of persistently high consumer-price inflation. However, the prospect of higher interest rates also sparked a selloff in growth and tech stocks, driving the STOXX® USA 900 into its biggest weekly rout since the onset of the COVID crisis in March 2020, as year-to-date losses grew by 5.9% to a total of 8.6%. The resulting flight-to-quality flows benefitted mostly Treasuries with maturities of 10 years or more, where borrowing rates ended the week 3-6 basis points lower.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated January 21, 2022) for further details.

Portfolio risk soars, as stock and bond prices tumble

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio soared nearly two percentage points to 9.4% as of Friday, January 21, 2022, as the anticipation of tighter monetary policies depressed the prices of stocks and short-dated bonds alike. US equities experienced the biggest surge in their percentage risk contribution, from 46.5% to 54.8%, while the fixed-income assets in the portfolio saw their combined share of overall volatility surge by 5.5%. Oil, meanwhile, added very little to total portfolio risk, after a pipeline shutdown in Turkey propelled crude prices higher, completely decoupling them from stock markets.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated January 21, 2022) for further details.