Multi-Asset Class Risk Monitor | Week Ended October 15, 2021

• US Treasury curve flattens, as strong earnings tame inflation fears—for now
• Higher short-term rates make pound more attractive
• Stocks and bond rise together—and so does portfolio risk

US Treasury curve flattens, as strong earnings tame inflation fears—for now

Short US Treasury yields rose while longer-dated maturities fell in the week ending October 15, 2021, as strong earnings reports soothed investor fears fuelled by persistently high consumer-price increases. US headline inflation came in at 5.4% for September, its fifth consecutive month with an annual growth rate of 5% or more. As a result, the monetary policy-sensitive 2-year rate climbed to its highest level since the Federal Reserve cut its target rate to 0-0.25% in March 2020, with short-term interest-rate futures now pricing in a 55% chance of a rate hike by July next year—up from 13% at the time of the last FOMC meeting on September 21-22. Yields greater than 15 years, meanwhile, fell by 10 to 12 basis points, as the STOXX® USA 900 posted its strongest weekly gain of 2.1% since mid-July, boosted by upbeat quarterly corporate results and an unanticipated increase in US retail sales.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated October 15, 2021) for further details.

Higher short-term rates make pound more attractive

The pound sterling gained 1% against the US dollar in the week ending October 15, 2021, as a growing majority of traders now predict the Bank of England’s first rate hike since the onset of the COVID pandemic before year-end. Higher interest rates tend to make a currency more attractive to foreign investors. Yield increases were most pronounced around the 1-year point of the Gilt curve, which climbed 7 basis points to 0.38%. Longer maturities, on the other hand, ended the week up to 15 basis points lower, following the lead of their US counterparts.

Please refer to Figures 3 & 6 of the current Multi-Asset Class Risk Monitor (dated October 15, 2021) for further details.

Stocks and bond rise together—and so does portfolio risk

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio surged 0.7% to 8.5% as of Friday, October 15, 2021, as long-term government-bond prices rose alongside recovering stock markets. Global inflation-linked sovereign securities experienced the biggest increase in their percentage risk contribution, from 4.9% to 7.3%, as long-term breakeven rates soared to their highest levels in more than eight years, surpassing the most recent peak from May this year. USD investment-grade corporate bonds, meanwhile, saw their share of overall portfolio volatility more than double from 1.1% to 2.3%, receiving an additional performance boost from tighter credit-risk premia. The Japanese yen, in contrast, provided the biggest diversification benefit, due to its low correlation with most other asset classes in the portfolio.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated October 15, 2021) for further details.