The economic configurations and behaviours after the pandemic caused by COVID-19 will be very different from those that prevailed earlier once the rebound phase begins, Janus Henderson’s Australian fixed team says.
Although investors should expect a ‘U’ shaped profile for growth over the period ahead, the current restrictions on population mobility would continue to push the economy into a sharp and deep recession, with significant job losses.
However, powerful policy response would have a positive effect as they would seek to limit how deep the ‘U’ would be and how to build a bridge to the other side.
“Once lifted, the rebound phase or coming out of ‘controlled hibernation’ phase will commence,” Frank Uhlenbruch, investment strategist in the Janus Henderson Australian Fixed interest team, said.
“While we expect activity to recover, economic configurations and behaviours will not be the same coming out of this pandemic as those that prevailed pre-pandemic.”
According to Uhlenbruch, market volatility created opportunities and saw sell-off in government bond yields in the face of a strong risk-off period and therefore investors were seeking to add duration via longer-dated securities to fixed interest portfolios.
“Our expectation is that the yield curve will flatten given the cash rate will be anchored at 0.25% for at least three years and the Reserve Bank of Australia (RBA) has a 0.25% target for the three year government bond,” he noted.
“We remain mindful of the tension between secular forces keeping the rate structure low with the desire to save relative to invest in ascendency.
“Once volatility quells, such a regime will see investors search for yield again and drive elevated credit spreads in.”