Faced with a crisis of historic proportions, central banks responded with equal gusto; plunging policy settings further into uncharted territory. So far, the major central banks have all been reading from the same hymn sheet, with policy comprising three key pillars:

1. Slashing short term rates to effectively zero – unfortunately as rates were already very low, this had only a minor impact.

2. Flooding the bond market with ample liquidity and money supply, in a process called Quantitative Easing, which reduces the long-term rates for Governments and Corporates.

3. Forward guidance of the intention to keep rates on hold until inflation exceeds the target range (2-3%).

Such a significant rise in money supply does create the risk of an increase in inflation, and in turn tighter monetary policy. Our view is that the excess capacity in the labour market, most significantly in Tourism and the Arts, will prevent any sustain broad-based price inflation (although we note that there will be an uplift in 2021 due to base effects).

As a result, short-term interest rates will most likely remain at current levels until unemployment returns to the pre-crisis lows, sub 4% in the US and sub 5% in Australia, which is not expected to occur until 2023 or 2024.

With short-end yields anchored, the yield curve is likely to steepen as fiscal stimulus supports rising growth rates. The extent of the rise in long-end yields is likely to be suppressed by central bank intervention as they seek to maintain low borrowing costs for Governments to encourage an uplift in investment.

This decade will mark the end of a 40-year bull market for bonds characterised by falling bond yields that delivered equity-like returns for fixed bonds, with lower risk. Without this tailwind, the outlook for long-duration bonds (i.e., Government Bonds) promises to be meagre or negative.

Despite the long-term headwinds for government bonds, the strong economic growth outlook presents opportunities in specific segments of the market – particularly residential mortgage-backed securities (RMBS) and floating-rate credit – which remain attractive on a relative basis.

Overall, we have a negative view on duration, and prefer to focus on shorter maturity, floating rate securities and investment-grade credit, which provide the best risk / reward profile should inflation unexpectedly rise. At present, the strategy has a weighted maturity of 3.4 years, a running yield of 3.3% p.a., and a yield to maturity of 2.8%.

Read more about our view on bonds outlook, in our 2021 Bond Investment Strategy Guide

Cameron Harrison have been advising business owners and their families on asset allocation and intergenerational wealth management for over 50 years. We have demonstrated over a long period our ability to manage investments through both the good times and bad by keeping the client at the centre of our business.

For more information on our approach to investment strategy or any other inquiries, please contact us on +613 9655 5000.