Debt ceiling debate throttled risk appetite
While banking sector concerns remained in the background, the market focus shifted in May to the debt ceiling discussions and to AI (artificial intelligence). The rates market prepared for a rising supply of Treasuries to come after the resolution of the debt ceiling, pushing rates higher. This was helped along by the fact that no recession signs emerged. Higher rates turned the Risk Appetite down, but sectors more exposed to growth — and to AI — did better.
This 10-year illustration captures the cyclicality of investors' appetite for risk.
March '16–Jan '18
Risk assets rally amid improving commodity prices, perceived stability in China's macro data, and expectations for gradualist Fed policy.
March '20–Dec '21
Easy monetary policies and reopenings supported risk assets.
Central bank tightening, inflation, and Russia-Ukraine War increase volatility and uncertainty.
Source: Putnam. Data as of May 31, 2023. To create the Global Risk Appetite Index, we weigh the monthly relative returns of 30 different asset classes over 3-month T-bills relative to the trailing 2-year volatility of each asset class. The higher the relative return and the lower the volatility, the greater the risk appetite; conversely, the lower the relative return and the higher the volatility, the stronger the risk aversion.
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