ABE Weekly 10/03/2021

Market Update  

 

Don’t let yesterday take up too much of today  

 

It’s ironic to think that the financial system collapse caused by COVID 19 is all but a distant memory now. Westpac recently lifted GDP growth forecasts from 4% to 4.5% for 2021 and is sticking to 3% for 2022This suggests Australia is on track to achieve pre-pandemic GDP levels by Jun 2021 – who would have thought! Anyway, that’s certainly good news for the economy and all concerned. One does have to say though that this has been the quickest and sharpest bounce out of recession in living memory. In this context it’s worth re-iterating that the RBA will continue to undertake whatever to keep the economy afloat. On that note, it means rates aren’t going anywhere, only strengthening the case for investing in high yield corporate and yield enhanced bonds. 

Fed Chair, Jerome Powell talked down speculation of an imminent rate rise in the US based on a steepening yield curve. The steepening came on the back of better-than-expected economic data suggesting growth was accelerating at a faster rate than previously expected. Suggestions state that “persistent tightening in financial conditions” would be unwelcome but this failed to really calm down the situation. The chart below illustrates just how quickly the yield curve steepened over 6mths in the US; a phenomenon also witnessed here in Australia. 

With $3 trillion still sitting in low interest-bearing accounts like bank and term deposits and the fact that the RBA is committed to keeping rates at 10bps for at least the next 3-5 years, there must be a shift towardhigher interest-bearing instruments out of necessity as investors get desperate for income. It’s important to point out that many of the corporate bonds offered by the Bond Exchange have above average yields and have been resilient when it comes to valuation even in the face of unprecedented volatility in financial markets around the world.  

The Bond Exchange is committed to the education and delivery of tested alternate fixed income products. Just as investors were wary of ETF’s initially, we believe the rate of market adoption for yield enhanced securities will grow exponentially in the years to come. The European experience is certainly proof that based on necessity investors will eventually gravitate towards new forms of investment. There is, only so long people can live on zero rates.