The yield on the German 10-year Bund rose by as much as 20 basis points in a matter of hours, a rise of almost 50%!
It may be obvious that such a highly volatile environment presents major challenges for investors. We have seen quite some examples now of central banks having difficulties communicating their intentions to the markets.
And it is clearly not unlikely that more examples will follow. From a portfolio risk management perspective, these kind of occasions emphasise the importance of a well-informed, unbiased and active asset allocation.
Given the substantial volatility spikes as mentioned above, more and more investors choose to delegate their allocation decisions to specialised multi-asset teams.
As we saw ECB easing expectations being priced into the government bond market, we decided to underweight German Bunds in our multi-asset portfolios already in the first part of November. In the weeks that followed, we also took some risk off the table by neutralising our equity and fixed income spread positions.
Divergence between ECB and Fed policy is – although well telegraphed to the markets – coming to the surface more clearly now.
The announcements from both central banks hitting the markets in December, combined with lower-than-usual market liquidity, was for us reason enough to opt for a relatively light asset allocation stance as we move towards year-end.