Equity risk ticks-up in the US, Canada, Japan and Australia; Asset correlations climb in the US; Mexican peso strengthens against the US dollar
AXIOMA RISK MONITOR
MULTI-ASSET CLASS EDITION

Treasury yields take a weird bounce, startling pundits
Dollar soars amid decisive Fed action
Portfolio risk surges, as correlations are jumbled

 

HIGHLIGHTS FOR THE WEEK ENDED MAR 13

 
 

Treasury yields take a weird bounce, startling pundits

 

Treasury yields around the world plummeted to record lows at the start of the week ending March 13, 2020, only to rebound sharply, ending the week firmly in the black. The steep drop in government bond prices (which move inversely to yields) occurred Thursday, just as stock markets in some regions were experiencing their worst one-day declines since “Black Monday” in October 1987—a situation that startled many pundits.

Normally, demand for safe sovereign debt can be expected to rise in times of equity-market turmoil, so the simultaneous price drop in both asset classes seemed surprising. Potential explanations for this unusual circumstance ranged from liquidity issues, caused by the heightened demand, to arbitrage funds being forced to unwind their losing positions, thus accelerating the downturn. The various fiscal stimulus packages announced by governments also likely added further upward pressure on financing rates.

Nevertheless, the German Bund curve once again dipped completely into negative territory, with the 30-year rate bottoming out at -0.48, before ending the week just below its previous record low of -0.25% in August 2019. The risk premium of 10-year Italian BTPs over German Bunds, meanwhile, soared another 56 basis points to 2.36%, after briefly surpassing 2.50% on Thursday.

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Please refer to figure 4 of the current Multi-Asset Class Risk Monitor (dated March 13, 2020) for further details.

 


Dollar soars amid decisive Fed action

 

The US dollar appreciated almost 3% against a basket of major trading partners in the week ending March 13, 2020, as the Federal Reserve Bank followed up the previous week’s emergency cut with the injection of trillions into short-term funding markets, while its European counterpart left rates on hold. The strengthening was spread widely across all G10 currencies, with gains ranging from 1.5% to over 8%. The Swiss franc and Japanese yen—traditional safe havens—exhibited the smallest losses. More volatile currencies, such as the Norwegian krona and the Australian dollar, experienced much bigger drops. Both are now riskier than the pound, which depreciated by nearly 5%, as the FTSE 100 large-cap index dropped by close to 11% on Thursday, underperforming its US equivalents by around 1.5 percentage points.


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Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated March 13, 2020) for further details.

 


Portfolio risk surges, as correlations are jumbled

 

Short-term risk in Axioma’s global multi-asset class model portfolio almost tripled to 35.85% as of Friday, March 13, 2020. Half the gain was due to a surge in share-price volatility, with the rest being caused by significant changes in correlations. The substantial depreciation in foreign currencies over the past week amplified losses in non-US equities, simultaneously raising both their volatility in USD terms and their perceived correlation with their American counterparts. The increased exchange-rate variability also meant that non-USD fixed-income securities appeared to move more closely in line with debt instruments in other regions, as well as with stocks in the same currency. The latter effect was further compounded by the recent co-movement of share and bond prices. Both effects combined meant that the high-quality fixed-income holdings no longer reduced overall portfolio risk.


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Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated March 13, 2020) for further details.



 
 
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