Tim Hext’s weekly bond market outlook

Portfolio manager Timothy Hext from Pendal's Bond, Income and Defensive Strategies team.

 

Here’s the bond market outlook from Pendal portfolio manager Tim Hext ahead of this week’s interest rate decision and US election. Reported by portfolio specialist Dale Pereira

 

It’s all about this week.

Quantitative Easing and Blue Waves. Two expressions seldom mentioned — let alone together in a sentence. But Tuesday and Wednesday all will be revealed.

The RBA has been talking about rate cuts and likely Quantitative Easing (QE) for several months. Now it’s delivery time.

Yield Curve control, cash rates to 0.1% and Exchange Settlement to 0.01% look likely. QE of $100 billion in bonds and semis out to 10 years also seem likely.

Soon after polls will open in the US. By lunchtime Wednesday in Australia results will be flooding in.

The presidential race is critical and the US Senate may be on a knife’s edge.

A Joe Biden victory will mean massive stimulus with a Democrat Senate but major blocking if the Republicans hold it.

A Donald Trump victory would likely pave the way for decent stimulus because both a Democrat and Republican Senate would likely support it.

With new waves of Covid in Europe and the US, there is little doubt that extra fiscal and potentially monetary stimulus is needed.

Markets are largely priced for it. Only a contested election or a hostile senate can block it because both presidential candidates will want to start a term with a massive boost.

The balance of probabilities should be risk friendly, with only contested outcomes a landmine in waiting.

Pendal named 2020 Fund Manager of the Year in Zenith Awards. 

By Wednesday evening we should know where investment markets are headed for the next few months.

As always markets will move fast and we have our plans in place to adjust positioning for the outcomes. We want to make sure we are proactive — not reactive — to the news, a mistake many made in 2016.

Even as the US election result eventually becomes yesterday’s news, whoever is in power will face the tough task of rebuilding the US economy.

There may be some very short-term wobbles, but bonds should still perform. The main data point in Australia last week was the September quarter CPI.

A childcare-led bounce-back from the June quarter meant a 1.6% headline number or 0.7% Yearly. Underlying was 0.4% or 1.2% yearly.

All in all inflation has held in well this year. Goods prices are going up while services flat line — the reversal of a near 30-year trend.

While Covid is partly behind this — and it’s too early to call a trend — we will be keeping a close eye on how this unfolds in the quarters ahead.

Massive fiscal stimulus and the re-emergence of demand and supply could see prices tick higher in 2021 — a welcome development for the RBA but not the current market view.

And did we mention the Melbourne Cup? Avilius at $40 is a good outsider but this does not constitute a trade recommendation. 

 

 

Tim Hext is a portfolio manager with Pendal’s Bond, Income and Defensive Strategies team.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Find out more about our investment capabilities: https://www.pendalgroup.com/about/investment-capabilities

Contact a Pendal key account manager:
https://www.pendalgroup.com/about/our-people/sales-team/

This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at October 30, 2020. It is not to be published, or otherwise made available to any person other than the party to whom it is provided.

This article is for general information purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation.

The information in this article may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information in this article is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information.

Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance.

Any projections contained in this article are predictive and should not be relied upon when making an investment decision or recommendation. While we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections.

Related Articles