Back to Blog feed

Farewell To An Old Friend

24 August 2018 by Gary Kirk

Last year, with credit spreads tightening close to historic levels, it seemed appropriate to us to take a more prudent stance and move to a more balanced portfolio.

In the search for a suitable risk-off product, the Australian government bond market was an obvious candidate as it offered a degree of negative correlation to our credit positions, ample liquidity, and no immediate threat of tightening from the Reserve Bank of Australia. For a considerable period of time this position has served our portfolio well.

However, investor caution, driven in part by geo-political events, has driven Australian government bond yields to levels where this strategy looks less attractive. We still do not envisage any RBA rate hike this year, but the flat yield curve and outright levels now outweigh the benefits we identified originally.

All of this has been over-shadowed by the political turmoil that has dominated Australian headlines over the past few weeks. Amid a benign economic backdrop and growing social unease, Prime Minister Malcolm Turnbull has been ousted by his ruling Liberal Party after a challenge from Home Affairs Minister Peter Dutton, only for the party to vote in favour of former Treasurer Scott Morrison, who becomes new Liberal leader and the seventh Australian PM in the last 10 years. This internal political strife will perhaps be familiar to investors on the opposite side of the world!

The markets were lifted on the news but it does leave a question mark as the ruling coalition holds a majority of just one seat in parliament, and with outgoing PM Turnbull saying he will stand down from his seat in due course, it could lead to a situation where there is no overall majority and heightened political uncertainty in the run-up to next May’s general election. The opposition Labour Party, led by Bill Shorten, must be encouraged by the turmoil and in-fighting between rival groups within the Liberal party, but it is likely the markets will be less enamoured with a Labour party running the economy.

A combination of the available yield, a flat curve and political uncertainty has made the position less appealing for now, but this may change once yields move higher and look attractive again.



This material is for information purposes only. Any views expressed are those of the author, and do not necessarily reflect the views of TwentyFour. TwentyFour does not warrant the accuracy or completeness of any information contained herein, and therefore it should not be considered as an indication of trading intent, personal investment advice, or a basis on which to buy, hold or sell any investment vehicle/instrument. As such, TwentyFour accepts no liability for any use, or misuse, of the material in this commentary. This material may not be reproduced, in part or in whole without the express prior written permission of TwentyFour.

Please remember that all investment comes with risk and positive returns are not guaranteed and you may not get back what you invested. Investing in fixed income securities comes with credit risk, default risk, inflation risk and interest rate risk.