'Very easy' monetary conditions to stay for three years: Western Asset

Fixed income specialist Western Asset is optimistic on Australian fixed income, favouring semi-government bonds despite the reduction in the cash rate last year.

In its market outlook, the firm, which is an affiliate of Franklin Templeton, said the Reserve Bank of Australia (RBA) would be able to maintain “very easy” conditions for the next three years.

Rates were cut from 0.25% to 0.1% last year, a record low for Australia but it brought the central bank in line with other developed markets.

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“The RBA recently reduced the cash rate to 10 basis points (bps) and also embarked on its first real quantitative easing (QE) program with the purchasing of government and semi-government bonds alongside the current yield curve control program,” it said.

“The RBA’s focus is now on realised forecasted inflation and unemployment levels as well as maintaining very easy monetary conditions for at least three years.

“We favour high-grade sectors such as semi-governments, supranational debt and index-linked bonds for insurance purposes.”

Meanwhile, the firm was negative on Japanese fixed income due to an expected steeper yield curve.

“In Japan, we expect a steeper yield curve, especially in the super-long end as the front end and intermediate part of the curve are likely to stay low under the yield curve control framework by the Bank of Japan (BoJ),” it said.

In Europe, the firm was wary of higher-risk sovereigns but was also optimistic about the COVID-19 vaccine rollout and the level of fiscal and monetary support.

“Strong fiscal and monetary support helped the continent contain the damage in 2020 and will support the 2021 rebound, together with vaccination progress,” it said.

“Divergent fiscal stances at the national level are likely to have an impact on the speed of recovery since progress on the supranational recovery fund is somewhat slower than expected.

“That said, EU-level borrowing will still expand markedly right away, increasing the pool of supranational safe-haven assets.

“The ECB [European Central Bank] is, for now, in a wait-and-see position after its commitment to favourable financing conditions.”

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