MAC Monitor — June 29, 2021

Multi-Asset Class Risk Monitor | Week Ended June 25, 2021

  • Bond yields continue to rise as inflationary pressures grow
  • Yield curves continued to flatten in a vote of confidence on the economic recovery
  • Equity and currency volatility drives up portfolio risk while correlation impacts offset each other

Bond yields end the week higher on continued inflation fears

10-year government bond yield rose again last week for both the US dollar and the euro. Continued evidence of inflation and the prospect of the US Federal Reserve ending its asset-purchasing program sooner than expected appear to be unnerving investors, despite official assurances that the uptick in inflation is a temporary result of the reopening of the economy and the low base from last year. Investors are hoping for a robust economic rebound, but without overheating, which would require the Fed to step-in to cool things down. One bit of good news from all this is that the risk-contributing positive correlation between equities and bonds has now returned to neutral, breathing some diversification back into multi-asset class portfolios.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated June 25, 2021) for further details.

Yield curves continued to flatten in a vote of confidence on the economic recovery

The continued gradual flattening of government yield curves points to a consensus belief in a continuing economic recovery. While short-term US treasury yields rose more than their European counterparts as investors responded to the Fed’s mildly hawkish stance in its last minutes, the flattening of the curve signals that investors do not believe the economic recovery is at risk. The European government bond yield curve also continued to flatten as the ECB reiterated its intent to keep interest rates low for the foreseeable future and to maintain, or even increase, its asset-purchasing program if needed, thus remaining focused and supportive of economic growth, rather than stressing over inflation.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated June 25, 2021) for further details.

Equity and currency volatility drives up portfolio risk while correlation impacts offset each other

Short-term risk in Qontigo’s global multi-asset class model portfolio rose by 35 basis points to 7.15% last week. The rise in portfolio risk was entirely due to increases in the volatility of the underlying holdings, as cross-asset class diversification remained unchanged. The decline in the positive correlation between equities and bonds was entirely offset by an increase in the correlation between equities and currency gains. This meant that the 39 bps in risk-reduction from a decline in interest-rate risk was offset by increases in the risk contribution of equities (+41 bps) and currencies (+34 bps) in the portfolio. US and Developed World equities both increased their overall contribution to portfolio risk, well above what their weights in the portfolio might suggest. Conversely, emerging market equities saw a decrease in its contribution to portfolio risk. Credit risk was the only diversifying risk type this week, as credit and interest-rate risk increased their negative correlation in light of the recent US interest-rate worries by investors.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated June 18, 2021) for further details.