This is the eye of the storm

Charlie Jamieson

Jamieson Coote Bonds

Western countries continue to face problems with high debt burdens, ageing demographics, and automation. These problems have been exacerbated by COVID, and they're not going away any time soon. These forces will stoke disinflation, and will be supportive of long term government bonds.

Markets still face a coming wave of of insolvencies, a situation which has been fuelled by a government moratorium on company insolvency. During the GFC, it took four years for insolvencies to peak, how long will it take in this crisis?

In this video and transcript, I expand on these issues, the phasing out of government income support measures, and the dynamics in bond markets today.

Edited transcript

The insatiable demand for equities the world over continued through the month of August, a time when we started to see seasonality impact some risk markets. But equities are taking it all in their stride. Offshore technology is leading the way, with exponential moves, in what is really quite an extraordinary thing to view.

Bond markets backed up a little bit over the month of August, taking a breather for the first time in a number of months as the result of very heavy supply; but already in the opening days of September, we're seeing all of that be absorbed and those moves are starting to reverse quite substantially.

It is extraordinary to think about the amount of supply in bond markets. Australia did its largest ever government bond issue at the back end of August. The markets did a good job of building in a good concession for that, but they had $66 billion of demand for the new 2031 bond with only $21 billion being issued, leaving substantial demand unsatisfied.

This is a similar thematic to what we saw at the end of July when Australia issued a new 30-year bond, again with a $35 billion order book, two thirds of which was coming from global investors to satisfy an issue of only $15 billion of securities.

So very, very high demand for Australian government bonds; as we've written about previously, Australian government bonds remaining quite cheap to other global bond markets with much steeper yield curves.

So certainly, it's something that we're still looking at through 2020. There is reason to stay invested as we believe that we're still in a very disinflationary environment for all of the secular reasons that we've articulated previously. It's unlikely that they will be disrupted anytime soon.

There are, of course, very negative demographics in the West, very high debt burdens, technology impact which has just accelerated so much through COVID; automation, robotics and the uptake of technologies. Of course, globalisation itself, and the lack of unionisation around so many economies.

And so we still expect that disinflationary backdrop to markets. That will be very supportive of long-dated global bond yields and Australian bond yields for quite some time to come.

We still have this insolvency phase, which we believe is coming for markets. It's a very slow moving theme. I guess it's important to remember that in a 24-hour news cycle where so many of us now are used to instant gratification, the credit cycle has moved so slowly.

If we think back to the last cycle, we know that subprime started to get quite problematic in the United States in 2006. We had the big crescendo moment where that was realised by banks and equity markets in 2008, but insolvencies didn't peak until 2010. It really is one of those cases where folks will desperately try to hang on as long as they can.

In Australia, we know that those generous government support systems are going to extend into the first quarter of next year with JobKeeper and JobSeeker around until the end of March. But we do still believe that the Morrison government wants to start winding those programmes down. That's when the rubber meets the road in the next phase.

So it's something to keep on the radar, but probably the nearer term things that we need to consider; some potential second-wave outbreaks of COVID in some parts of Europe at the moment. And of course, the presidential election coming up now with Trump closing the polling gaps to Biden quite substantially; and what could that look like for markets?

We absolutely don't expect a result anytime soon around election day. We expect both sides will contend and contest that very aggressively through the courts because of mail-in voting.

There was a little bit of a timing anomaly with regard to where the month ended after big supply concessions and a little bit of a sell off towards the end of the month; but broadly, bond markets are not doing a huge amount of oscillating around fairly stable valuations. However, we need to consider what that's going to look like coming into the presidential elections, which is clearly something markets will be very focused on come November.

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This information is provided by JamiesonCooteBonds Pty Ltd ACN 165 890 282 AFSL 459018 (‘JCB’) and JamiesonCoote Asset Management Pty Ltd ACN 169 778 189 AR No 1282427. Past performance is not a reliable indicator of future performance. The information is provided only to wholesale or sophisticated investors as defined by the Corporations Act 2001 (Cth). Neither JCB nor JCAM is licensed in Australia to provide financial product advice or other financial services to retail investors. This information should not be considered advice or a recommendation to investors or potential investors in relation to holding, purchasing or selling units and does not take into account your particular investment objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information having regard to these matters, any relevant offer document and in particular, you should seek independent financial advice.

Charlie Jamieson
Chief Investment Officer
Jamieson Coote Bonds

Charles is a co-founder of Jamieson Coote Bonds (JCB) and oversees portfolio management of the Australian and Global High Grade Bond and Dynamic Alpha investment strategies. Prior to JCB, Charles forged a career as a seasoned bond investor from...

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