- Bond yields end the week higher on continued inflation fears
- Yield curves continue to flatten after an initial steepening on inflation fears
- Lower equity volatility and correlation with bonds increases diversification
Bond yields end the week higher on continued inflation fears
Long bond yields rose last week across all four major currencies, as investors continued to react to higher inflation readings and the likelihood of tapering by the US Federal Reserve sooner rather than later. US treasuries seesawed last week, caught between inflation fears and safe-haven buying from falling equity prices. The yield on the USD Gov 10Y bond ended the week slightly higher than the previous week, but remains on a downtrend since late March, as most investors continue to agree with the Fed that inflationary pressures are temporary. This resulted in only a slightly lower positive correlation between stocks and bonds, which remains a concern for multi-asset class investors, as they must compensate for this lack of diversification in their portfolios.
Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated June 18, 2021) for further details.
Yield curves continue to flatten after an initial steepening on inflation fears
Yields on long-term US Treasuries held steady last week, while short-term yields rose slightly on tapering news, resulting in an overall flattening of the US yield curve versus 20 days ago. In Europe, the yield on long-term euro-sovereign bonds continued to decline, following confirmation of the ECB’s continued asset-purchasing program. Short-terms bonds also declined on receding inflation fears, resulting in a further flattening of the euro-sovereign yield curve. Net-net, fears of a bond-market inflation tantrum are fading, which may help support a recovery in equities, as investors there take their cues from bond investors.
Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated June 18, 2021) for further details.
Lower equity volatility and correlation with bonds increases diversification
Short-term risk in Qontigo’s global multi-asset class model portfolio rose by 56 basis points to 6.80% last week. A 95-bps increase in volatility was offset by a 39-bps increase in cross-asset class diversification. The decrease in US equity volatility was more than offset by rising volatility in the FX and commodity holdings, which increased the risk contribution of international bond holdings. Once again, all of the asset classes contributed positively to total portfolio risk, highlighting how much the current co-movement of equities and bonds, not to mention equities and FX (from a USD perspective), is hurting multi-asset class portfolios. Even the two commodity holdings (oil and gold) are contributing more to portfolio risk than their weight in the portfolio might suggest.
Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated June 18, 2021) for further details.