In December, Australian bond yields increased by +34bps to 1.37%, in response to improving US economic conditions, as well as increased macroeconomic certainty with regards to a trade deal between the US and China, and the decisive political victory for Boris Johnson in the United Kingdom. Despite the monthly sell-off in domestic yields, the Australian 10 year bond rate remains significantly below its prior 2.32% rate at the start of 2019.
In November, bond yields in the US and Australia moved in different directions. US sentiment towards a potential agreement between the US and China on trade is firming, and a clear message that interest rates are on hold for the foreseeable future saw bonds increase by 10bpts to 1.78%. Conversely, Australian bond yields declined by 10bpts to 1.03% amid increasing sentiment that the RBA will continue to cut official interest rates in the New Year. While the RBA is hopeful that these extraordinary low interest rates will stimulate consumer spending, the latest GDP estimate indicates otherwise. Further, domestic GDP for the September quarter came in at just 0.4% (1.7% annual) implying that the low interest rates together with the tax cuts announced in the last budget are not driving consumer spending patterns.
During the period, both the RBA and US Federal Reserve reduced official interest rates by -25bpts to 0.75% and 1.50% respectively, in attempts to stimulate economic activitiy despite already historically low interest rates.
In September, increases in bond yields both domestically (+13bpts) and in the US (+16bpts) were a key driver of weakness within listed equity markets, given the long term negative relationship. Bond yields at the long end of the curve rose despite the US Federal Reserve cutting its official cash rate by -25bpts to 1.75% and the RBA cutting to 0.75%. These increasingly aggressive actions by central banks are responses to stimulate economic activity, however, it is questionable whether these actions have so far proved to be successful amid a backdrop of global geopolitical tensions.
Alceon Group acquires a significant shareholding in specialist real estate and infrastructure manager, Freehold Investment Management. First joint fund launched.
In August, our Funds outperformed the broader equities market. There were several catalysts for this. Firstly, the macroeconomic backdrop continues to deteriorate with no real improvement in the ongoing trade dispute between China and the US and this is impacting global growth expectations. Secondly, the month was dominated by reporting season, which, in many cases only reinforced the increasingly difficult global conditions. This is further evidenced by the continued bond market rally which saw US bond yields decline by 50bpts to 1.50% and domestic 10yr bonds fall by 30bpts to 0.89% over the month. Central Banks around the world are also reacting, with official interest rates continuing a downward trend in the hope of stimulating an increase in economic activity and generate some upwards inflationary pressures. It is hard to say if this has been truly successful to date.
In July, defensive equities continue to be underpinned by declining global bond yields. The ongoing trade dispute between China and the US continues to gain momentum with neither side looking to back down from their respective views. Meanwhile in the UK, Boris Johnson became the new Prime Minister replacing outgoing Theresa May. With Johnson perceived as a hardliner towards Brexit, the uncertainty as to how this plays out continues to be a headwind for the market. This ever increasing uncertainty is being reflected in the ongoing bond yield rally – with Aussie 10yr bonds declining by a further -14bpts in July. Central banks around the world are also reacting, cutting official interest rates in the hope of stimulating an increase in economic activity and to generate upward inflationary pressures. To date this has been met with mixed success.
In June, a deteriorating global growth outlook continues to push both the cash rate and global bond yields lower. This has driven a flight to defensive sectors such as A-REITs and infrastructure, given their historical high correlation. As a result, brokers continue to upgrade many of these defensive names given the lower risk free rate used in their valuation models. Meanwhile, domestic headwinds continue to intensify. The Australian housing market remains sluggish and lending restrictions are tight, whilst inflation and wages growth is anaemic. In an attempt to stimulate the economy, the RBA cut official interest rates to a record low 1% during the month.
In May, a deteriorating global growth outlook and continued trade disputes continued to cause an ongoing decline in bond yields, driving investor appetite towards interest rate sensitive asset classes such as AREITs and listed infrastructure. Domestically, the Federal election result and its absence of changes to negative gearing and capital gains taxation buoyed the broader equity market, and in particular residentially exposed names re-rated sharply during May. The broader backdrop however remains challenging, characterised by low core inflation, persistent slack in employment and a housing market constrained by lending restrictions. As a result, the Reserve Bank cut the cash rate to 1.25% as widely expected, addressing spare capacity in the labour market to progress towards the inflation target.
In April, a rebound in US retail sales and a GDP reading coming in above expectations saw bond yields in the US increase slightly over the month, despite recent rhetoric by the Federal Reserve that any interest rates likely remain on hold. Domestically, the housing sector continues to see valuation declines impacting consumer sentiment. Furthermore, inflation for the quarter was well below expectations leading many market participants to speculate an interest rate cut may be imminent.