Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 348

Virus creates liquidity threat for lower quality bonds

Markets are dominated by coronavirus fears, triggering significant positive performance in high quality fixed income assets. As the threat of a global pandemic increases, economies are likely to collectively suffer with both lower demand and significant supply disruptions.

There isn’t a magical human policy which can easily make this go away. Interest rate cuts and liquidity will help, but they cannot solve the clear and present dangers we are currently facing. That’s worth thinking about as we look forward over the coming months, because we don’t think liquidity helps with supply issues this time.

Jamieson Coote Bonds (JCB) believes that the global environment was already slowing into the onset of this outbreak, but it is almost certain that economies will suffer intense slowdowns as a result. Virus-effected economic data for February is only now coming through.

Looking at China data to date, as the earliest country to experience COVID-19, it has been far worse than expected. This could trigger a cashflow crisis in corporates, and we hold grave fears for markets’ and central bankers’ ability to help in a ‘supply’ side shock.

Weak manufacturing data from China

The depth of the shock is sobering indeed. The official Chinese Government manufacturing data and the private sector manufacturing series for February posted outcomes far worse than the depths of the GFC. This type of economic outcome is likely in all virus-affected geographies over rolling time frames as the virus spreads.

The outlook for bonds in the short term

For bonds there are two clear pathways forward as we see it.

  1. The virus has already created significant supply and demand destruction, putting large pressure on corporate cashflows, killing incoming economic data. Hoping for the best, if the virus can be contained in the days and weeks ahead, markets will still require huge policy accommodation to deal with this shock. We are seeing the start now as the RBA cut rates 0.25%, the US Federal Reserve (the Fed) cut rates by a 0.50% emergency, the first since GFC, the Bank of Canada cut by 0.50%, and Hong Kong also followed suit. Rate cuts and liquidity programs will see bonds, as well as some other assets, continue to perform well.

  2. Our worst fears are realised, the virus drags on for a prolonged period and triggers a global credit event. In this instance return ‘of’ capital will be paramount, rather than return ‘on’ capital and government bonds would be one of the few standalone asset classes to provide that certainty plus providing significant liquidity. In this instance we would expect strong returns both on an outright and relative basis versus other asset classes.

Liquidity is the key in this uncertain terrain

We cannot stress enough the possibility that markets may totally seize. The speed and velocity of the current moves in an algorithmic dominated world are quite astounding versus what we previously experienced in the GFC. A total panic moment could potentially be ahead if the plumbing of the financial system cannot be lubricated – the credit markets must find a way to re-open and provide corporates the ability to roll existing debt obligations forward.

There is a very serious liquidity crunch unravelling, as parts of the funding markets and most of the corporate credit market are frozen. To date, central bank rate cuts have clearly not resolved these issues. It is highly likely the Fed and other central banks will need to inject an avalanche of additional stimulus and liquidity. In other words, more rate cuts, liquidity provision, extended swap lines, uncapped repurchase agreements and further quantitative easing.

 

Charlie Jamieson is Executive Director and CIO of Jamieson Coote Bonds (JCB). This article contains general information only and does not consider the circumstances of any investor.

JCB is an investment manager partner of Channel Capital, a sponsor of Firstlinks. For more articles and papers from Channel Capital and partners, click here.

 

  •   11 March 2020
  • 1
  •      
  •   

RELATED ARTICLES

5 insights that put market volatility in perspective

Invest in equities until you reach your sleeping point

How are high net worths investing and thinking now?

banner

Most viewed in recent weeks

Why spending more in early retirement can improve lifetime income

Conventional wisdom encourages retirees to preserve superannuation. But if those likely to qualify for the Age Pension later in life spend a little more today, it may deliver higher lifetime income and a more stable retirement.

Testamentary trusts have secured the CGT exemption

Treasury’s latest CGT reform draft delivers a win for testamentary trusts and deceased estates, exempting estate-derived gains from the 30% floor. However, questions on death and divorce rollovers remain unresolved.

Meg on SMSFs: What do we think about reversionary pensions these days?

Reversionary pensions have long been a staple of SMSF estate planning, but are they still the best option? Meg Heffron revisits a once-clear favourite and asks whether changing super rules have shifted the balance.

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

How does the 4% rule stack up?

The 4% rule has long been retirement's gold standard. But after a difficult period for investors, fresh analysis suggests a more conservative approach may significantly improve the chances of making savings last.

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

Latest Updates

Planning

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

Superannuation

There's a reason why your super is locked up until your 60s

For decades, it seemed settled. Then one controversial idea reignited a debate that could reshape the financial future of millions. The real question isn’t who’s right or wrong, but whether a long-held assumption deserves another look.

Property

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Retirement

Under-retiring: The greatest retirement risk in a generation

Two retirees. Similar savings. Completely different lives. New research from Challenger reveals why some Australians confidently spend in retirement while others hold back and the overlooked factor shaping retirement decisions.

Five risks to watch in markets

Things you may often hear are: a recession is around the corner, markets are overpriced, the AI sector is about to flop at any moment. It’s like the never-ending laundry pile that sits in my house, it never really disappears.

Investment strategies

Do you qualify as ‘rich’?

What does it mean to be 'rich'? For something so universally desired, it is surprisingly difficult to define. That ambiguity creates a challenge for investors and raises a bigger question about what financial success really looks like.

Investment strategies

If you’re worried about your bond portfolio, you’re missing the point

Most investors think they know what bonds are for. But when markets turn volatile, a surprising misunderstanding can lead to costly decisions. Here’s the overlooked lesson that could change how you view your portfolio.

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.