Ying Yi Ann Cheng, Portfolio Manager of the Switzer Higher Yield Fund appeared on Switzer TV to discuss the current state of play of the bond market the impact the Coronavirus will have.
Peter Switzer (PS): Well, joining me now is Ying Yi Ann Cheng from Coolabah Capital. She is the portfolio manager for the Switzer Higher Yield Fund. Ying Yi, great to see you.
Ying Yi Ann Cheng (YYAC): Great to see you Pete.
PS: People are getting a little bit worried about the stock market, Coronavirus, the bond markets, the yields have been falling lately, and of course doomsday merchants seize upon this, hoping to get that crash that they’ve been praying for, for a long time. So, you’re the right person to ask these questions. What is the bond market saying about the Coronavirus still in Australia and the possible economic slowdown?
YYAC: That’s definitely being factored in. Bonds are rallying off the back of this and that is a good reflection in that respect, because it does convey the fact expectations are lower rates, and that’s because the RBA needs to put in some sort of assimilatory measure to support the economy while we’re going through lockdown. Obviously, the implications of both the New South Wales and Victorian lockdowns have profound sort of impacts on economic growth and GDP, subject to I suppose the economy reopening again. We shall get a bounce back, but that’s not something that’s probably expected until at the end of the year, in the last quarter.
PS: Your colleague Chris Joye was fantastic in predicting us getting on top of the Coronavirus and the fact that a vaccine would come much before most people did. What is his market crystal ball saying right now about the implications of this? Sure the bond market is responding to what might happen over the next quarter or two, but even you implied in that answer that maybe around the end of the year we should see a rebound, if the vaccination program does well. What is Chris saying to you guys in your meetings with him?
YYAC: A lot of our views are very centred upon RBA QE (quantitative easing), i.e. their bond purchases. Our view around rate hikes in the future is not something that we expect until at least 2023. We expect that the RBA will continue to do bond purchases well into 2022. The RBA actually announced in their July meeting that they would move to a more flexible stance on quantitative easing. They did suggest that they would reduce purchases from 5 billion to 4 billion a week. However, as we expected that decision to reduce it from 5 billion to 4 billion was a very marginal call and it feels like it could have gone the other way as well.
The whole emphasis for them has been on flexibility, right? So, In the case of pre New South Wales lockdown, pre Victorian lockdown going from $5 million to $4 billion would have made a lot of sense. You could argue that given what we’re going through now, there is probably a strong case to not necessarily reduced from 5 billion to 4 billion. In fact, there are certain banks saying due to the impact of these lockdowns, the IVA will either backtrack on their table at that August meeting coming up, or at least they are considering that for their September meeting. So, Westpac has come out today. For example, they’re suggesting that the RBA may actually announce an increase in one purchases to $6 billion per week to provide additional monetary stimulus while large parts of the economy frozen.
I would say that we agree that this is a possibility, as is the RBA designed to increase the propulsion of state government bonds that they are buying relative to the Commonwealth government bonds, for example.
PS: You guys would be happy about that because you’ve kind of thought that the RVI going for well, I called the tiny taper from 5 down to 4 billion was a maybe a little bit too soon?
YYAC: As emphasised, it’s always been a flexible point of view. We actually felt that the 5 billion to 4 billion made did make a lot of sense. That’s taking into account the fact that, had the RBA continued at $5 billion per week pace, given that versus the backdrop of reduced Commonwealth bond issuance and reduce issuance from some of the states, before then, had they been continuing at the same pace they would’ve have actually been buying more bonds than was issued in terms of their target, right? So, 4 billion is just commensurate with that fall in issuance. We’re in a slightly different situation, a couple of weeks later with the New South Wales lockdown. So, you know, as always emphasized, flexibility is the key here.
PS: Okay. One last question. And you know, how I love to make you look into the crystal ball and like big predictions now you don’t like doing it too bad, you’re qualified to do it. My question is, will a bigger and bedded a vaccination rate overseas and here as well, ultimately lead to a more confident bond market? And eventually we’ll see yields probably rising maybe around the time you’re suggesting, end of the year when things look better?
YAAC: I suppose the key point there would be yes, vaccination rates and definitely improvements in vaccination rates will have a strong sort of knock-on effect in terms of voicing sort of confidence around borders reopening and therefore economic activity. In that respect, I think the bond market will progressively have to factor that into account. Obviously, high yields is actually not good for fixed rate bonds. It’s good for floating rate notes, which is that part of the market where we’re focused on. We’re focused on running floating rate portfolios. As rates move higher that, on the back of better growth, better economic conditions overall, that actually benefits us. That is something that we are quite confident about over time. Albeit, we know that Australia started it’s vaccination path belatedly, however, it looks like we are on track and are progressing at the same sort of linear phase. As you know, some of the other key developed countries that we consider to be peers. Our house view is that eventually borders will reopen next year following a possible election in March. That’s off the back of Australia reaching herd immunity in January or February next year.
PS: Great stuff, Ying Yi, thanks for joining us.
YAAC: Thanks, Pete.
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