Bond yields rise and dollar gains as investors abandon safe havens

Week of September 22

Last week, interest rates on British government securities continued their ascent, rising to levels last seen in early February. The 10-year yield broke through the 1.40% mark on Thursday, up 6 basis points for the week and almost 40 basis points from the most recent trough at the beginning of the month. Government bond prices had already fallen substantially earlier in the week as risk appetites remained strong. The 10-year German Bund yield rose 2 basis points on Monday, while the same-maturity Treasury benchmark climbed 3 basis points. US interest rates were buoyed further by strong indications from the Federal Reserve Bank after its two-day meeting on Tuesday/Wednesday that there may be one more rate hike this year, despite easing inflation pressures.

The signals from the Fed also supported the US dollar, which gained 0.3% against a basket of major currencies. Among the biggest losers were safe-haven currencies, such as the Swiss franc and the Japanese yen, which both depreciated almost 1% versus the greenback. The euro, on the other hand, ended the week slightly in the black, bolstered by healthy purchasing managers’ index data on Friday. Short-horizon exchange rate risk fell across the board, with declines ranging from 0.14% for GBP/USD to 0.22% for EUR/USD.

Meanwhile, short-term risk in Axioma’s global multi-asset class model portfolio continued its decline to 3.31% in the week ending Sep. 22, 2017, compared with 3.48% the previous Friday. Most of the reduction happened in the fixed income category, where the contribution to overall portfolio volatility decreased by 0.14%. This was mostly due to a lessening in the positive correlation between interest-rate and foreign-exchange factor returns. The effect, however, was felt most by USD-denominated bonds, with US Treasuries now slightly reducing portfolio risk by 0.01%.

Christoph Schon, CFA, CIPM

Christoph Schon is the Executive Director, Applied Research for EMEA at Axioma, where he generates insights into recent risk trends with a particular focus on fixed income and multi-asset class analysis. Christoph has been in the portfolio risk and performance analysis space for more than 10 years, having previously worked for Lehman Brothers/Barclays POINT and UBS Delta.