Australian Government Bond Yield…the outlook’s not so good any more

What a difference three months can make. The Australian Government Bond Yield has gone from a positive outlook, to negative, and Bill Evans of Westpac has just made the call that the next interest rate move from the Reserve Bank should be down. For those of us who read this blog, you  may recall that Charlie Lanchester of Perpetual actually told me that he believed interest rates would be going down before they go up as he believed our economy was so much weaker than many believed (Blog entry here)…in fact most of our concerns have actually played out to some degree. Anyway, I digress.

A couple of nights ago, I dialled into a Blackrock teleconference that I think was run from their head office overseas, where they conducted a panel discussion of the Euro Sovereign Crisis and what they thought the future held. Bottom line was that they were very positive for the outlook of both European and Global equities as they believed valuations are discounted enough to provide some downside cushion and if the pending defaults from the Euro Sovereign Crisis is handled in an orderly fashion then markets should perform well in this second half of the year. Of course, if it was disorderly and contagion starts to appear then all bets are off and no-one really knows what the outcome would be.

Personally, my big concern is that contagion is quite a likely scenario adn I agree that the market adn economic impacts are unknown. Whilst I agree equities are well priced (compared to long-term history) and corporate balance sheets look strong, I’m making the call that it is absolutely prudent to be quite underweight equities as the risks appear enormous and I don’t want to be exposed to that contagion possibility. Even if corporates are looking strong, if the global financial system is stuffed because banks start becoming insolvent, through bank runs or asset value decline, then corporates may still be stuffed as spending grinds towards a halt like three years ago.

So where should we invest the sold down positions…I’m still backing Australian term deposits. The premium over bank bills is still attractive and it should continue as local banks continue to use term deposits as an important funding vehicle whilst overseas funding continues to be difficult. The Australian government debt position is very strong and our local banking scene will be fine.

   Send article as PDF