Bond yields fall to all time lows - or less - on inflation expectations
This week saw the first instance of a negative interest rate bond issue by the Australian government. Now while the bond market in Australia is not as well understood or as large as it is overseas, and as such it didn't make the front pages of even the financial press, the event is pretty significant.
For the record the actual negative interest rate was -0.07%, so in actual terms it's pretty marginal, as was the size at $200m of the actual issuance. Equally the 10 year bond yield traded at an all time low yesterday of 2.27% per annum yesterday. However the reality is that some investors have bought Australian government bonds on which they will effectively PAY the government 0.07% per annum for the privilege. As the good doctor would once have said: "why is it so"?
Our understanding is threefold: firstly various investors and institutions in Australia are required to hold a portion of their assets in government bonds. In that event they have no choice, although they do have a choice of which issue to invest in.
Secondly, overseas investors believing that their currency (such as the Yen) might actually fall vs the A$ will be playing the currency trade.
Finally the fact that this issue attracts a negative interest rate is an indication that inflation, (currently 1.7% pa) going forward is expected to fall further, and remain below the RBA's official cash rate. This historically low inflation rate is a real concern for the government and the economy, even though it may be welcomed by sections of the community, simply because it indicates limited, or potentially zero (or worse) economic growth.
Which leads us to the government's more immediate issue, namely the forthcoming budget.
One somewhat tricky point for the government while trying to manage the economy is that they comprehensively fluffed last year's budget to the extent that various measures have yet to pass the Senate. So lopsided, and in our humble opinion, poorly devised and subsequently communicated was last year's budget that many of its key features have had to be abandoned, and in doing so any element of political capital the government might have had has now evaporated.
So just when the country is in desperate need of long-term thinking and budgetary reform, it is unlikely we are going to get it. Having just announced a tax White Paper the Prime Minister has already ruled out various options (including the abolition or scaling back of negative gearing) that might have been recommended simply because they would be politically unacceptable to the government's support base.
Equally it would appear that any change to the GST, whether by increasing the current rate from 10 to 15%, to bring it more in line with most other developed countries, or by broadening it to include the other half of the economy which is currently GST free, would seem to be a bridge too far for the government's current standing in the opinion polls. Hence the only real GST debate we are currently seeing is the squabbling between State premiers, which make them look much like siblings or cousins at the reading of great aunt Thelma's will.
As a result it looks like this year's budget will include the usual tinkering around the edges, some of which will be unpopular and some popular, but all with an eye on how many votes might be won or lost as a result. Sadly what we need is a strong and reforming government which can make the hard but necessary decisions to overcome the current budget woes and set the country on the course of a sustainable economic footing.
Specific results received this week include the following MARCH PERFORMANCE UPDATES:
The Bennelong Long Short Equity Fund returned 3.59%, to being the performance over the latest 3 months to 6.40%.
Laminar Credit Fund rose 0.54%, to bring the Fund's annual performance since inception to 19.33% pa.
The Monash Absolute Investment Fund returned 1.1% in March, when the Australian Equity Market fell slightly -0.09%.
QATO Capital Market Neutral Long/Short Fund rose 3.12%, bringing the Fund's performance for the last 6 months to 25.16%.
FUND REVIEWS released this week, with the potential for earning CPD points: Alpha Beta Asian Fund; Supervised High Yield Fund
25-27 May 2015 - Digital Marketing for Banking and Financial Services Summit
And this week for something completely different, given we recently missed Maurice Joseph Micklewhite's (a.k.a. Sir Michael Caine) 82nd birthday, click here to see him impersonating himself (amongst others) on the Parkinson show.
On that note, I hope you have a happy and safe week-end.
Kind regards,
Chris
CEO, AUSTRALIAN FUND MONITORS
Connect with me on LinkedIn Twitter
| Registration to AFM is free and provides general information and performance data on Absolute Return, Hedge Funds and Alternative Investments. | Fund Managers and paid Subscribershave access to details on Individual Managers and Funds, with historical results, key performance indicators, latest news and performance reports. | Prism Select provides self-directed investors and their advisors with factual information, performance data and opportunity to apply for funds online using OLIVIA123. |
Tune into Foxtel's Sky Business every Monday at 2:15pm for AFM's weekly comment. |
