Rumours of the yield trade's demise are greatly exaggerated

Rumours of the yield trade's demise are greatly exaggerated. In a wide ranging speech overnight, Glenn Stevens, the Reserve Bank Governor, gave the clearest indication yet that he will not lift the Overnight Cash Rate for an extended period. Mr Stevens faces the dilemma that animal spirits in investor housing are buoyant while animal spirits remain dormant in the corporate sector. As long as the RBA continues to under-estimate the power of monetary policy to revive the corporate sector's animal spirits, the Australian economy will remain stuck in a nominal recession. From a portfolio construction perspective, this means more of the same and bodes well for the yield trade. In an environment where revenue conditions remain subdued, analysts are unlikely to materially lift their earnings forecasts for cyclical stocks. Australia's under-capitalised banking system represents the key risk to the yield trade, but that is not actionable right now, at a time when growth in business credit remains anaemic. (VIEW LINK)