BONDS AND CASH
The RBA and central banks globally remained accommodative in support of bond markets via stimulus programs. Yields on 10-year treasures, both domestically and globally, rose slightly during the quarter as confidence grew off the back of vaccine news. Bond returns were again however muted in the December quarter. Australian bonds (Bloomberg AusBond Govn 0+Yr) hit negative territory on a real basis (-0.3%) whilst global bonds (BBgBarc Global Aggregate TR Hedged) were slightly positive (+0.8%). Corporate bonds
squeezed a little more spread during the quarter and continued to outperform government bonds; Higher yielding bond assets remained broadly buoyant with cooperative monetary policy in place; Cash yields took another hit as the RBA cut the official rate in November to its lowest in history, dropping to 0.10%.
It’s fair to say the December quarter of 2020 will be remembered for some time, packed full of events and market gyrations.
We had virus outcomes worsen over the quarter as the northern hemisphere entered their colder months, which resulted in an increase in cases and hence an increase in restrictions and lockdowns. On the positive side, we saw the announcement of successful phase 3 trials for three different vaccines, with two granted emergency use authorisation before the end of the year.
We also had the US election result, or lack thereof for some time, as ballots continued to be counted well after election day. President Trump, his legal team, and others launched numerous challenges regarding the outcomes in certain cities and state, but to no avail, with Joe Biden and Kamala Harris all but confirmed as the new 46th President and Vice President of the USA. The election result also saw the Democrats retain the House but with a smaller majority, whilst the Senate remained undecided as the state of Georgia had a run-off to confirm their two seats. Leading into the election, most had a mixed or messy election result being negative for markets, but investors seemed to find positives in the result.
The UK and the European Union (EU) finally struck a trade deal with no time to spare before their self-appointed deadline, which saw the UK finally and formally exit the EU.
Closer to home, there was plenty to assess and absorb. On the virus front, politicking over state borders continued, whilst we also saw increased restrictions leading into Christmas on a relatively small number of cases. We had important announcements on both the fiscal and monetary policy front with the Federal Treasurer handing down one of the biggest budgets in decades with deficits expected for the next 4-5 years and federal debt likely to clear the trillion-dollar mark in the not-so-distant future, all in the name of helping the economy recover from recession in 2020 and to assist in kickstarting the recovery in 2021. This was
followed up with a big, but expected, announcement from the Reserve Bank of Australia where they lowered the RBA Cash Rate to an all-time low of 0.1%, provided the banks with cheap borrowing lines to encourage them to lend, and kickstarted Australia’s first foray into quantitative easing (QE) with a program for $100 billion. Lastly, but not least, Australia-China relations continued to sour over the quarter, with the Chinese targeting almost all Australian exports with exception of iron ore.
From a market perspective, investors focused on the positives in the quarter with successful phase 3 vaccine results resulting in a very aggressive rotation into cyclical and Covid exposed sectors and stocks, whilst continued support from government and central banks along with a Joe Biden presidency likely leading to considerably more US fiscal support led to broader support for markets, particularly growth assets. Cash and bond returns, whilst positive, were weak given extremely low central bank cash rates and very low bond yields, with significant bond buying by central banks continuing through their quantitative easing programs. Assets denominated in Australian dollars performed strongly as the Australian dollar rose on soaring iron ore prices whilst the US dollar continued to weaken.