MAC Monitor — March 15, 2021

Multi-Asset Class Risk Monitor | Week Ended March 12, 2021

ECB buying pledge spurs European bond rally; Treasury curve steepens further, as inflation concerns remain high; Portfolio risk surges on stronger FX/equity co-movement

ECB buying pledge spurs European bond rally

Eurozone sovereign bonds saw their prices increase in the week ending March 12, 2021, as the European Central Bank pledged to increase the pace of its asset-purchasing program in the coming months to counteract the adverse effects of rising borrowing costs on the bloc’s faltering economic recovery. In contrast, British and US 10-year benchmark rates—which move inversely to prices—surged by 7 and 8 basis points, respectively. Peripheral issuers, including Italy, Greece, Portugal, and Spain, were the biggest beneficiaries, as all saw their risk premia over German Bunds decrease. The rising risk appetites were also reflected in lower spreads in the euro-denominated corporate-bond market, especially for securities with sub-investment grade credit ratings.

Please refer to Figures 4 & 5 of the current Multi-Asset Class Risk Monitor (dated March 12, 2021) for further details.

Treasury curve steepens further, as inflation concerns remain high

The term spread between long and short-dated US sovereign yields rose to its widest level in more than five years in the week ending March 12, 2021, as medium-term inflation expectations climbed to 2.5%—the highest since mid-2008 and well above the Federal Reserve’s 2% target. The fact that actual consumer-price growth for February came in at 1.7% did little to soothe investors’ concerns, with many expecting the numbers to continue rising in the coming months, as the $1.9tn stimulus package rolls out. Meanwhile, shorter maturities up to 2 years remained within the Fed Funds target range of 0-0.25%, expanding the 30-year/2-year rate differential to 2.30%, the widest it has been since the end of 2015.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated March 12, 2021) for further details.

Portfolio risk surges on stronger FX/equity co-movement

Short-term risk in Qontigo’s global multi-asset class model portfolio surged another 1.4 percentage points to 9.5% as of Friday, March 12, 2021, driven by a combination of higher exchange-rate volatility and a stronger co-movement with share prices. This made all non-USD securities in the portfolio seem more correlated, both with each other and also with US equities. Non-US sovereign bonds experienced the biggest increase in their percentage risk contribution at 1.8%, followed by investment-grade corporates (1.6%), global inflation-linkers (1.5%), and developed equities (1.4%). While Oil also saw its risk contribution rise slightly, but continued to subtract from overall portfolio volatility, due to a strong negative interaction with all fixed-income securities, as well as EUR and JPY cash.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated March 12, 2021) for further details.