Rising rates cause risk sell-off
Risk assets sold off in August due to rising Treasury rates. The overall direction of rates continues to be higher, but it is subject to a variety of forces, such as weaker economic reports, a mixed inflation picture, and the possibility of central banks intervening in currency markets. In the short term, it appears that higher rates are not causing spreads to widen. Despite the possibility of a risk-off event, markets appear to have ample liquidity.
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 August 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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