Australian Bond Exchange Weekly Newsletter
19 August 2022
“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” — George Soros
Key Points
- Australia’s $2.4 trillion of super funds pivot to bonds
- Interest rate update
- Bank of England to sell $23bn of corporate bonds
- River Rhine impacts Germany’s economy
- Current investment opportunities
Highlight
Australia’s $2.4 trillion of super funds pivot to bonds due to fears that the global economy is sliding into recession. After years of neglecting bonds and binging on stocks, members of Australia’s retirement savings are buying sovereign bonds.
“A recession globally is going to be very hard to avoid over the next six to 12 months,” said Katie Dean, Head of fixed-income at AustralianSuper Pty, the largest pension fund in Australia with A$261 billion of assets. The answer to this is “really around increasing that allocation to fixed-interest, so increasing that allocation to bonds. Five of Australia’s top pensions also suggest the move to debt will accelerate.
Cbus Super, the A$70b Construction & Building Unions Superannuation Fund, said bonds now represent “reasonable value.” CEO Justin Arter said, “after being poor value for as long as any of us can remember, all of a sudden they’ve come back into the viewfinder.
Source: Willis Towers Watson
Economic Update
Interest Rate Update. The Reserve Bank’s August minutes suggest further interest-rate increases are set to take place in the coming months. “The Board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path,” the Reserve Bank of Australia’s Aug 2 policy read.
“It is seeking to do this in a way that keeps the economy on an even keel. The path to achieve this balance is a narrow one and subject to considerable uncertainty.”
The term “pre-set path” signals that at some point the Board will take a shift down in the pace of tightening from 50 basis points per meeting to 25 basis points as policy moves into the “contractionary zone”.
The size and timing of future rate hikes “will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market, including risks to the outlook.”
Australia’s Unemployment Rate. The Australian Bureau of Statistics (ABS) has reported a seasonally adjusted unemployment drop to a new record low of 3.4% in July 2022 from June’s 3.5%.
Bjorn Jarvis, head of labour statistics at the ABS said “The fall in unemployment in July reflects an increasingly tight labour market, including high job vacancies and ongoing labour shortages, resulting in the lowest unemployment rate since August 1974.”
Global Update
Tight New Money Supply
The Bank of England sets out plans to sell $23bn of its corporate bond stockpile. To support the economy and stabilise financial markets after the 2016 Brexit referendum and during the COVID 19 pandemic, the BoE bought nearly 20 billion pounds of investment-grade bonds from non-financial companies to stimulate spending in the economy – quantitative easing. Bond sales will decrease the money supply in the economy by swapping out bonds for cash. BoE said it aimed to complete the corporate bond sales by early 2024.
Shipping Bottlenecks Impacts Germany’s Economy
Low water levels of the Rhine due to sustained weeks of dry and hot weather have caused delays to shipping and increased freight costs with economists saying that the disruption could knock half a percentage point off economic growth in Germany. Approximately 80% of German goods are transported down the Rhine ranging from grains to chemicals to coal. The German economy is already facing high inflation, supply chain disruptions and soaring gas prices after Russia’s invasion of Ukraine in February.
Current Investment Opportunities
You can now invest in a new Australian dollar fixed coupon bond linked over Marks & Spencer PLC yielding a 6.00% per annum return paid every 6 months. Marks & Spencer Group PLC is a leading British Retailer that provides retail of clothing, food, and home products. The bond information is here.
You can also still invest in the 5.5% fixed coupon bond linked over Rolls Royce Holdings PLC, more information available here.
Contact us if you have any questions or would like any assistance.
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