Fixed income growth lacking with lower-for-longer cash rate: analysts

Analysts see a lower-for-longer official cash rate environment in Australia leaving little opportunity in fixed income growth.

Analysts ‘remain cautious’ of the potential risk of a second COVID-19 wave that would impact any sort of early economic recovery. Picture: AAP

Investment analysts told a Bloomberg forum on Thursday that they believe there will be little to no opportunity in fixed income growth, as forecasts point to a lower-for-longer official cash rate environment in Australia.

A slew of investment analysts joined the Bloomberg forum held on Thursday morning, and flagged the Reserve Bank’s current cash rate target of 0.25 per cent was likely to persist for at least three years, with the financial climb to recovery following the coronavirus pandemic likely to be slow.

Pendal Group head of bond and defensive strategies Vimal Gor said markets were showing no opportunity for fixed price discovery and would be solely driven by government and central bank spending.

“The markets are solely being driven by government economic policy, whether it be explicit government policy or implicit government policy” Mr Gor said.

“You are literally buying what they [central banks] are telling you to buy and it is wholly unsatisfactory, but there is nothing else really to do.”

In the past month, the RBA has stopped its bond buying activity through its unconventional monetary policy, which was implemented in March following the economic meltdown sparked by COVID-19.

UBS rate specialist Giulia Specchia, said the tapering of bond buying by the central bank is a sign that fixed income markets are retaining better liquidity, and that the RBA has reached its three-year bond yield target.

Economic recovery to be ‘modest’

Ms Specchia did note that the RBA would reignite bond buying if market conditions deteriorated and yield curves started to flatten.

Royal Bank of Canada chief economist Su-Lin Ong noted that the RBA’s current cash rate will likely hover around 0.25 per cent for the next few years, as economic recovery will be modest.

Ms Ong said RBC expects unemployment to remain at relatively high for some time, with stagnant wage growth, high levels of household debt and low productivity hindering a fast economic recovery.

RBA governor Philip Lowe previously noted that the central bank has no intention to further cut the cash rate, despite overseas central banks flagging future moves into negative interest rate territory.

Ms Ong said future rate moves are very much a “never say never” scenario, as further deterioration of the global economy could prompt the RBA to reconsider its current monetary policy.

“It is a potential tool in the toolkit, but unlikely that it is anywhere to be near a first option,” Ms Ong said.

“I think the RBA is at its very early stages of unconventional policy. It has a lot of options before it even entertains the idea of negative rates.”

Key portfolio ingredient

PIMCO’s co-head of Asia-Pacific portfolio management Robert Mead said the impact of coronavirus on financial markets highlights the importance in holding a proportion of an investment portfolio in bonds.

“When things go array, bonds turn out to be defensive every time and so owning some of that defence across a balance portfolio continues to be an absolute … key ingredient,” Mr Mead said.

Mr Mead also expects the current uplift experienced across the market to only last for a short period of time, or until the government reels in market intervention measures.

Ms Specchia said an overvalued Australian dollar is becoming a headwind to the country’s economic recovery, which might result in the RBA needing to talk down its valuation through a potential partial rate cut.

All four analysts told the forum that they remained cautious, as there was still a potential risk of a second COVID-19 wave which would impact any sort of early economic recovery.