The absolute lack of bond bears in the market is a clear indication rates aren’t rising any time soon, according to PIMCO managing director Robert Mead.
Appearing on a panel at Bloomberg’s recent Buy-Side Forum to discuss Australia’s low-rate economy, Mead said that in over a quarter of a century as a bond manager he is “used to hearing constant noise from bond bears saying rates are too low, [and] rates are going up.”
“Now that we’ve had record lows, there’s not a single bond bear out there,” he said. “It’s actually quite disconcerting.”
Mead was speaking on the decision earlier this month by Reserve Bank of Australia Governor Phillip Lowe to cut the cash rate, for the first time in three years, another 25 basis points to 1.25 per cent. He explained that the current attitude to bonds – which generally have an inverse relationship to interest rates – strongly suggests rates could drop even further. Referring to the scarcity of experts predicting that rates could go up and bonds might fall, he said there was “not a single voice, and only three to six months ago there were plenty of those voices”.
Just a year ago, he added, the chorus of those voices was “overwhelming”.
“It’s something to bear in mind; maybe there should be more contrarians out there, but at the moment there are none.”
Mead said the Australian cash rate is “going lower”, a sentiment shared by J.P Morgan chief economist and head of Australia and New Zealand fixed income and FX strategy, Sally Auld, who noted that rates “aren’t going up for a very long time”.
Auld explained that Australia has been “out of sync” with the global economy since the early 2000s.
“What’s happening in Australia is probably a familiar story in the sense that we’ve seen this play out in a number of big developed economies in the last decade; rates come all the way down to close to something like zero and they stay there for a very long time,” Auld said.
She illustrated the point with an anecdote about a recent trip to Germany, where she saw a Deutsche Bank sign in Munich airport advertising a 6-month term deposit rate for 0.75 per cent.
“I took a photo of it, [then] sent it back to my colleagues in Sydney and said – who’s going to be first, CBA, Westpac or ANZ?” Auld recalled. “My German colleagues said: ’You know what, that’s actually a pretty good rate, I might put some money towards that’.”
“That’s in a jurisdiction where they’ve been dealing with negative rates for five years,” she continued. “As much as we like to believe that Australia’s different – and maybe you could prosecute that argument on the view that we’ve got higher population growth and plenty of spare capacity on fiscal capacity to get things moving – I sort of feel like there’s a sense of inevitability about where we’re heading and I’m not sure as an investor I would be worried about higher rates anytime soon.”