There are several global events and themes on our radar for the remainder of 2019 and moving into 2020. Those who recognise the utility of bonds in a broader investment portfolio should take note of these broader conditions.
There have been strong gains for bonds in recent months, after a period of declines. An example from the Australian market is pictured below. Part of the reason for this could be that bond markets are responding to an anticipated global economic recovery.
Source: Bloomberg, as at 30/9/2019
Here, we take a look at some key events on the global stage that impact fixed income markets.
Policy easing has contributed to more supportive financial conditions worldwide, which is one to watch moving into 2020.
In fact, the monetary easing put into effect this year is one of the reasons our chief economist, Shane Oliver, holds some optimism about the global economy for the year to come.
That said, central banks are expected to remain dovish for a period, and in some cases, constrained in their ability to offer further support. The Reserve Bank in Australia, for example, has called on the federal government to introduce fiscal stimulus into the economy.
Growth on the global stage
Economic growth internationally is, as ever, one to watch. Broadly speaking, although monetary policy is set to have an impact, conditions are still soft and the risk of recession lingers.
Further, there are ongoing weak spots of note. For example, there is an increasing risk that trade-induced weaknesses in both Europe and Asia are becoming entrenched. Given time, this may begin to spill over into the United States.
In addition, core inflation has been suppressed, but looks set to be moving slowly higher if growth can rebound globally.
The fixed income market is also not immune to the knock-on impacts of an event which has had a far-reaching impact on international economies since it began: the US-China trade war.
The political climate in the US, as it heads towards the federal election in 2020, could prompt a short-term breakthrough. US President Donald Trump will be under pressure to keep the economy stable, and progress on trade talks with China would be favourable for his campaign.
Nevertheless, the conflict remains a key risk to watch and monitor for impact.
In focus: the Australian market
No doubt, in a lower-for-longer environment, investors in the Australian market would be questioning the utility of a bond portfolio.
Source: AMP Capital Global Fixed Income team, 30/09/2019.
Granted, Australian bonds will not be able to provide the same defensive attributes that they have historically, given the multi decade falls in yield, but in a world of ever increasing negative yielding debt, Australian bonds continue to offer defensive characteristics. Australian bonds whilst offering a low yield, remain a triple AAA rated, liquid, defensive asset, that is attractive to many of its peers.
Author: Ilan Dekell, Head of Macro Sydney, Australia
Source: AMP Capital 5 Dec 2019
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