Global and Australian market commentary from Jamieson Coote Bonds
The changing bond market
After the rapid rise in the cost of capital the world over, economies are beginning to falter. China, Germany, Holland, New Zealand and now Australia, are rapidly slowing, bringing high quality fixed income back on the radar of many serious investment committees. With many other asset classes still enjoying lofty valuations after an extraordinary period for investors, the reset of global yields in bond markets continues to draw in fresh capital, as asset allocation from large institutional investors continues to rebuild exposures to lock in future incomes and benefit from any further economic deterioration expected under restrictive policy settings.
The material reset of yields through the rate hiking cycle has delivered some markets back to yield levels not seen since GFC, with many US government bonds now yielding more than 5.00%. This reestablishment of yield makes for a compelling income alternative, whilst also providing a significant cushion against further rate rises. Depending on the maturity of a bond (longer-dated bonds are more interest rate sensitive), the expected payout from equally weighted market moves remains very attractive.
With Central Banks at the end of their tightening cycles and the specter of the global growth slowdown lurking ominously, many leading indicators such as inverted yield curves, tightening bank lending standards, slowing of mortgage applications, and weakening labour markets have historically been prescient indicators of a recession. Economic ills in China and Germany, historically countries that navigate through economic growth slowdowns, would suggest that the recent velocity of monetary tightening is impacting manufacturing and exports and the broader global economy.
Also read: New Australian Government Bond ETFs
Bracing for economic headwinds
The Antipodean Central Banks, the RBA and RBNZ, have strongly hinted that they are both at the end of their respective hiking cycles. This serves as an important indicator and has implications for other global Central Banks. It’s particularly noteworthy given that these economies are heavily leveraged and vulnerable to the potential impact of global economic growth downturns. New Zealand is already in official recession, albeit mild but with no policy support forthcoming, we expect this will continue to broaden to a more severe slowdown. Australia is now in a ‘per capita’ recession, as GDP per person was -0.3% in both the March and June quarters, meaning it is only population growth that is keeping the nominal numbers above zero. Historically the probability is high that rate hikes presage floundering economies and given the velocity of this rate hike cycle, the chances of a hard landing should supersede chances of a unicorn soft landing.
