MAC Monitor — March 9, 2021

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

US Treasury yields and inflation expectations continue to rise, as Fed insists it will remain “patient”; Dollar strengthens over widening interest-rate differential; Portfolio risk surges in perfect storm

US Treasury yields and inflation expectations continue to rise, as Fed insists it will remain “patient”

US Treasury yields climbed to their highest levels since the February 2020 stock-market peak in the week ending March 5, 2021, as the 5-year breakeven rate—a measure of medium-term inflation expectations—crept above 2.4%, significantly exceeding the Federal Reserve’s average target of 2%. Still, Chairman Jay Powell was quick to once again stress that he expected rate setters to be “patient” about withdrawing monetary support for the economy. His remarks on Thursday propelled the 10-year US Treasury benchmark above 1.56% for the first time since the onset of the COVID crisis more than 12 months ago, while share prices plunged to a 5-week low. The latter recovered slightly on Friday—after getting a boost from better-than-expected job-market data—and ended the week marginally in the black.

German Bund yields, meanwhile, traded slightly lower than the week before, as the seemingly slow rollout of coronavirus vaccinations weighed on investor sentiment.

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

Dollar strengthens over widening interest-rate differential

The US dollar strengthened 1.2% against a basket of foreign currencies in the week ending March 5, 2021, in its biggest weekly gain in over four months. The euro was among the biggest losers, depreciating almost 2% vis-à-vis its American rival, as the spread between 10-year US Treasury and same-maturity German Bund rates expanded to 1.88%—its widest since February 2020. Higher expected yields can make a country or region appear more attractive to foreign investors, which, in turn, benefits the associated currency. The decline in the EUR/USD exchange rate was accompanied by an increase in its predicted short-horizon volatility to 6.5%.

The Norwegian krone, in contrast, was the only G10 currency to record a gain against the dollar, supported by the sharp rise in oil prices.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated March 5, 2021) for further details.

Portfolio risk surges in perfect storm

A perfect storm of falling share prices, rising bond yields and a strengthening dollar boosted the predicted short-term volatility of Qontigo’s global multi-asset class model portfolio by 1.4 percentage points to 8.1% as of Friday, March 5, 2021. More than 80% of the surge in overall volatility was recorded for the three equity categories. However, in terms of percentage risk contributions, the biggest increases occurred in the non-USD sovereign and investment-grade corporate-bond buckets, which were affected by a stronger co-movement with both stocks and foreign-exchange rates against the US dollar. On the bright side, the recent surge in oil prices meant that the commodity was suddenly inversely correlated with share and bond prices, resulting in a risk lowering effect from including it in the portfolio.

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