RiskWatch for Q4 2022

RiskWatch provides recent data on volatility and correlation, the two components of risk, for U.S. and global equity and fixed-income markets. The equity data are derived from Qontigo's medium-term fundamental risk models. One set of tables is designed to capture U.S. market sectors plus countries and currencies with the highest and lowest levels of volatility, and how that component of risk has changed since the end of the prior quarter. The highest and lowest correlated countries within developed and emerging markets are also highlighted. Another table illustrates how currency volatility can be a major driver of risk in multicountry benchmarks and can often change substantially from one quarter to the next. The fixed-income data, detailed in the multiasset-class section, consist of U.S. and eurozone government yields, investment-grade and subinvestment-grade spreads as well as correlations among those asset classes and selected currencies. Note that the following charts use the Axioma WW4 (worldwide) model: predicted volatility by currency, predicted volatility by country and country-country correlations. Data are as of Dec. 30, 2022. Change compares with the previous quarter.

The yield curve, as measured by the spread between the 10-year Treasury bond and six-month Treasury bill, inverted in July for the first time in more than 40 years. By mid-December, longer-dated yields had retreated, but Treasury bill yields continued to climb, driving the ratio of the two (the spread) to its lowest level since 1981. The inversion of the yield curve is often described as a precursor to recession, which is why the 40-year-low level is concerning to many investors. Of course, back in 1981 interest rates at both end of the maturity spectrum were three to four times higher than they are now, but the proportional difference was quite similar to its current level.