The world is in the grip of the perfect storm with the Coronavirus causing major disruptions and the global supply chain is one of the major victims. The recently released Chinese PMI indicator is a strong reminder of how severe this slowdown has been over the past couple of weeks and the news about supply shortages from products produced in China is growing by the day. Everyone is looking again to the Central Bankers in particular the US Fed which is expected to support financial markets with a mix of decreasing official interest rates and QE measurements.
On the back of this we have seen a massive flight to safety with investors rushing into the fixed interest space resulting in Government bonds worldwide falling to unprecedented lows. The yield on our 10y Government bond has fallen to a new all-time low of 0.68% which only just recently touched a high of 1.40% (this is a massive 51% fall in just 2 months!). The A$ also continued to be weak falling below $0.65 against the all-mighty US$ which should help absorb some of the slowdown form our major trading partners. Remember one of the major reasons why the RBA decreased rates last year was the effort to weaken the A$!
Markets are now pricing the RBA’s “terminal” rate for this cycle at 0.25% and the potential for some sort of quantitative easing later this year has strongly increased.
This puts enormous pressure on investors worldwide and the fixed interest market has provided them with a very safe and reliable space to place their money. We may have to get used to much lower returns and a weakened credit quality, nevertheless bonds are still a reliable part of investors’ portfolios in a very unstable and uncertain world.
What do you think is happening in the market at the moment? Are you worried there will be more or excited about what is to come? Call me now on 02 8076 9343 or email me your ideas!