Treasuries outperform and dollar declines as investors rush to safe havens

Week of September 1

Last week, we saw American sovereign issues outperform their European peers, as investors sought the safety of lower-risk assets. Government bonds and precious metals posted significant gains on Tuesday, when North Korea revived geopolitical tensions by launching a ballistic missile that went over Japan. Gold, in particular, reached its highest level since the surprise result of the US presidential election in November 2016, ending the week up 2.5%. The 10-year US Treasury yield fell by 2 basis points on the same day, extending Monday’s decline, following the devastation brought on by Hurricane Harvey. The downward trend in long-term interest rates continued in the US on Thursday, while European yields remained stable. On Friday, global rates rebounded slightly, but 10-year Treasuries still ended the week 1 basis point down, compared with a small 1-basis point rise for the same-maturity Bund and no change for the 10-year Gilt.

Over the same period, the US dollar declined slightly against a basket of its major rivals. Initially, the euro seemed to the biggest beneficiary of the USD weakness, gaining more than 1% over the first two trading days. However, the greenback was able to pare some of its losses as markets started to relax, so that the single currency ended the week almost flat. In the end, it was the British pound that profited most from the lower-than-expected US payroll data released on Friday and was thus able to recover from an 8-year low against the euro earlier in the week. Short-horizon risk for the GBP/USD exchange rate increased by 0.07% to 8.68%. Predicted volatility for the franc and euro rose by similar amounts, but JPY risk was marginally lower.

Meanwhile, short-term risk in Axioma’s global multi-asset class model portfolio reversed its recent downward trend, rising to 4.02%, compared with 3.89% the week before. The increase was driven by a combination of slightly higher FX volatility and a less negative correlation between the gold price and stock market returns. The precious metal has gained almost 10% over the last two months on the back of geopolitical tensions, while the negative impact of the latter on share prices was more subdued. This resulted in a reduction of the customarily inverse relationship between the two. Consequently, the contribution to overall portfolio risk from the gold future holding increased more than fivefold from 0.5% to 2.6%.

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.