“If you want the rainbow, you gotta put up with the rain.”
Dolly Parton
Economic and Bond Market Outlook
There is an increasing expectation that interest rates both in Australia and globally will go up sooner than previously anticipated.
Australia
The signs are that the Australian economy continues to strengthen, notwithstanding the continuing effects of the Omicron variant of the COVID-19 virus.
Household balance sheets are generally in reasonable shape, with substantial accumulated savings. Business investment is firming, there is a high volume of construction work in the pipeline, and job vacancy figures suggest strong employment gains to come. The reopening of the international borders will also be supportive of the tourism and international education sectors.
At its meeting on 1 February the Reserve Bank of Australia left its cash rate target at 10 basis points. Governor Phillip Lowe stated that the Bank “is prepared to be patient as it monitors the evolution of the various factors affecting inflation in Australia”.
Inflation and wages growth are two key measures the Reserve Bank focuses on in monetary policy decision-making.
In its most recent pronouncement, the Bank restated that although inflation has picked up, “it is too early to conclude that it is sustainably within the target band”. It’s likely that the Bank will also want to see clear signs of a sustained pick-up in wages growth, which still remains at relatively anaemic pre-pandemic rates.
However, in his answers to questions following his speech at the National Press Club on 2 February, Lowe also said that: “Faster progress towards full employment and inflation consistent with the target does bring forward the timing of the likely increase in interest rates.”
And as Laminar Capital’s Stephen Roberts commented, the Reserve Bank’s patience “will be tested every time a monthly labour force report or quarterly report of wages and inflation confirms the RBA’s forecast line. If the reports come in higher than the RBA’s forecast line… the RBA Board’s patience will dissolve.”
Global
Yields on U.S. 10-year government bonds hit their highest levels since 2020 recently on unexpectedly high U.S. jobs growth. The U.S. economy added 467,000 jobs in January, well ahead of consensus forecasts and accompanied by the biggest monthly wages increase in nine months.
The U.S. Federal Reserve has signalled the likelihood of near-term hikes in the U.S. federal funds rate to combat inflation, potentially as early as March. JPMorgan Chase and Goldman Sachs are predicting five increases in the federal funds rate in 2022, while Bank of America is expecting seven.
European monetary authorities have also turned more hawkish. European Central Bank Governor Christine Lagarde this week declined to repeat her previous guidance that an interest rate increase this year was “very unlikely”. This briefly pushed the German five-year government bond into positive territory for the first time in five years.
The central banks of the United Kingdom, New Zealand, Norway and Sweden have also begun increasing their policy rates as they also seek to deal with higher inflation, with further increases likely.
Although sharemarkets and cryptocurrencies will remain skittish, bond markets have been pricing in the likelihood of rate rises for some time.
The key challenge will be for central banks to ensure that their tapering of their monetary policy support (through lower target cash rates) avoids significant disruptions to investment markets.
Investors’ need for income-generating assets is likely to maintain demand for yield-enhanced investments in an environment where interest rates are almost certain to remain extremely low for an extended period.
Current Investment Opportunities
FHIM Trade Logistics
This is a new Australian dollar-denominated note linked to a shipping and trade finance fund from TradeFlow Capital Management. The bond was created jointly by ABE and investment manager Ferguson Hyams Investment Management. The bond is only available to sophisticated/wholesale investors.
TradeFlow is a fintech-powered commodity investment strategy and business which enables physical commodity trading for small and medium-sized firms. The company uses a proprietary digital trade services platform to manage and monitor cargoes globally, now possible because of the advent of Internet of Things (IoT) devices, artificial intelligence, and lower technology costs.
This 3.8-year bond maturing in October 2025 will pay a 5.50% fixed rate paid quarterly. All coupons and any final value will be in Australian dollars, without currency exposure. The note is available on the IRESS trading platform to improve secondary market liquidity.
Full documentation for this offering is available here.
Xerox
You can still invest in an Australian dollar fixed coupon credit-linked note over Xerox Holdings Corporation, a 6.5-year note offering a 4.50% per annum fixed rate with coupons paid half-yearly.
This is an opportunity to invest in debt linked to a Fortune 500 corporation which provides digital document products and services in more than 160 countries and pioneered office technology.
You’ll find full documentation for this offering here.
Pallas Capital
You can also still invest in the 7.5% fixed rate senior secured note issued by real estate financier Pallas Capital (wholesale investors only).
Contact us if you have any questions or would like any assistance.