Up and down the East coast of Australia, it seems almost everyone is focused on the property market.
This is something we expect will continue for the foreseeable future with the Federal election over the threat of negative gearing being abolished and the shrinking interest rate.
And whilst many property investors are hoping that the decline in house prices is over, it’s not looking that way. Research from Morgan Stanley suggesting house price will continue to fall.
Morgan Stanley’s research using their proprietary housing market model, suggests further price declines ahead. They even went so far as to state: “housing weakness is likely to persist through to the end of the year at least, with further downside to both approvals and prices.”
Changes in the local housing market will likely spur corporate bond demand for a handful of reasons.
The first and most obvious is that as prices fall, investors will look for more stable and liquid assets to protect and grow their capital.
Bonds will be one such asset class that offers a regular return even in the most volatile markets.
The second reason has to do with interest rates.
There is a lot of pressure on the Reserve Bank to continue to cut rates. Many commentators are starting to think the RBA will cut rates further under than 0.75% within the next year.
This will punish savers and cause those sitting on cash and term deposits to look for alternatives, whilst the impact lower rates will have on the currency should also stimulate demand for corporate bonds.
One of the key drivers of corporate bond demands is the fact they offer a regular, predictable income. Often used by retirees to fund their lifestyle as the returns on cash just won’t cover anything but the simplest lifestyle. This demand for bonds as a form of income has been a stable for over 200 years.
To learn more, have a read about how bonds work.