Treasury yields and dollar fall further, driven by ongoing tensions, Hurricane Irma and a cautious Fed

Week of September 8

Last week, we saw Government bond yields fall across the globe on the back of ongoing tensions on the Korean peninsula and some cautioning remarks from Federal Reserve officials. The 10-year US Treasury rate declined by 6 basis points on Tuesday, when Fed Governor Lael Brainard sounded a warning that the central bank needed to be confident that inflation was back on track before raising rates again. The American bellwether ended the week at 2.06%—down 10 basis points versus the previous Friday’s close and the lowest level since the presidential election last November. The same-maturity German Bunds and British Gilts followed suit, shedding 6 and 7 basis points, respectively.

Over the same period, the US dollar lost 1.6% against a basket of major currencies, caused by the same concerns over North Korea and the impact of Hurricane Irma. The Japanese yen benefited most from this, appreciating over 2% against the greenback. But as a consequence, short-horizon risk for the JPY/USD currency pair also increased by 0.11% to 8.82%, while the numbers for EUR, GBP and CHF remained almost unchanged.

Total gains were lower for the euro, but the single currency was still able to prolong its recent run, closing the week above the $1.20 mark, a level last observed in January 2015. In the press conference after the European Central Bank Council meeting on Thursday, President Mario Draghi noted that the euro’s recent strength had led the bank to revise downward its inflation projections, but stopped short of admitting that it was a concern, which markets interpreted as a positive signal for the currency.

Meanwhile, short-term risk in Axioma’s global multi-asset class model portfolio decreased by 0.13% to 3.89%. We observed the biggest reduction in the US Equity category, where the percentage contribution to overall portfolio risk dropped from 46.5% to 31.3%. The increased diversification was caused by the recent safe-haven buying, which led to a more negative correlation between stock markets on the one hand, and bonds and foreign currency on the other. On the flipside, the stronger relationship between interest-rate and FX returns led to a higher contribution from non-US government, inflation-linked and corporate bonds.

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.