MAC Monitor — November 29, 2021

Multi-Asset Risk Monitor Highlights | Week Ended November 26, 2021

  • Share prices and sovereign yields fall, as Omicron variant triggers flight to safety
  • Sliding stocks and COVID concerns boost credit-risk premia
  • FX effect makes non-USD assets seem more correlated

Share prices and sovereign yields fall, as Omicron variant triggers flight to safety

US and European sovereign yields recorded their biggest daily drop since the onset of the COVID crisis in March 2020 on Friday, November 26, 2021, as the discovery of the new Omicron coronavirus strain triggered a global flight from risky assets into the relative safety of government debt. The 10-year US Treasury benchmark declined 16 basis points, as the STOXX® USA 900 fell 2.2%, compared with Wednesday’s close. Stock-market losses were even more pronounced in Europe, where most of the latest lockdown measures and travel restrictions were imposed, with the regionwide STOXX® Europe 600 ending the day 3.7% in the red—its biggest daily decline on record.

Meanwhile, the short end of the US Treasury remained stable, as traders clung to their expectations that the Federal Reserve will raise its target rate by at least 25 basis points by July next year.

Please refer to Figures 3 & 4 of the current Multi-Asset Class Risk Monitor (dated November 26, 2021) for further details.

Sliding stocks and COVID concerns boost credit-risk premia

USD-denominated high-yield bonds experienced their worst weekly sell-off since March 2021, as a surge in credit premia far outweighed declines in risk-free sovereign rates. The average 5-year spread of BB-rated securities over same-maturity USD swaps surged 71 basis points, compared with a 3-basis point decline in the corresponding Treasury yield. The latest move more than offset a previous tightening in the yield premium of 0.51% since the start of the year. As a result, the price of the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) dropped 1.3%, wiping out two fifths of the gains in the preceding 10 months.

Please refer to Figure 5 of the current Multi-Asset Class Risk Monitor (dated November 26, 2021) for further details.

FX effect makes non-USD assets seem more correlated

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio surged 0.8% to 6.7% as of Friday, November 26, 2021, due to a closer co-movement of FX and interest-rate returns. This not only raised the percentage risk contributions of non-USD sovereign and investment-grade corporate bonds by 1.8% and 1.0%, respectively, but also made them seem more strongly correlated with other foreign-currency assets. As a result, non-US equities saw their share of overall portfolio volatility rise from 17.0% to 18.6%. High-yield securities, in contrast, remained the asset class with the lowest volatility contribution relative to their market-value weight, despite the recent surge in credit-risk premia.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated November 26, 2021) for further details.