Gilts underperform as FTSE reaches record high; Declines in FX and equity volatilities reduce portfolio risk

Week of June 2

Last week, we saw British government bonds underperform their US and German peers, as the yield of the 10-year Gilt benchmark rose by 4 basis points, while the same-maturity Treasury and Bund rates fell by 9 and 5 basis points, respectively. The increase in UK government borrowing rates went hand-in-hand with the FTSE 100 blue-chip index climbing to record levels and the pound appreciating 0.7% versus the US dollar. The rise in the UK stock market and currency occurred despite some recent polls predicting a hung parliament after the June 8 general election. This seems to indicate that markets are discounting the poll results and are still expecting a decisive victory of Prime Minister Theresa May’s Conservative Party.

Over the same period, short-term risk in Axioma’s global multi-asset class model portfolio fell by 0.32% to 4.13%. The decline was almost entirely caused by a reduction in the standalone volatilities of equity and FX risk factors. Consequently, the biggest decreases in risk contributions were observed for non-US developed (-0.10%) and emerging market equities (-0.07%), as well as non-US government bonds (-0.07%), corporates (-0.05%) and inflation-linkers (-0.03%).


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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.