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.

 

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

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Latest Updates

Shares

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Superannuation

When you can withdraw your super

You can’t freely withdraw your super before 65. You need to meet certain legal conditions tied to your age, whether you’ve retired, or if you're using a transition to retirement option. 

Retirement

A national guide to concession entitlements

Navigating retirement concessions is unnecessarily complex. This outlines a new project to help older Australians find what they’re entitled to - quickly, clearly, and with less stress. 

Property

The psychology of REIT investing

Market shocks and rallies test every investor’s resolve. This explores practical strategies to stay grounded - resisting panic in downturns and FOMO in booms - while focusing on long-term returns. 

Fixed interest

Bonds are copping a bad rap

Bonds have had a tough few years and many investors are turning to other assets to diversify their portfolios. However, bonds can still play a valuable role as a source of income and risk mitigation.

Strategy

Is it time to fire the consultants?

The NSW government is cutting the use of consultants. Universities have also been criticized for relying on consultants as cover for restructuring plans. But are consultants really the problem they're made out to be?

Sponsors

Alliances

© 2025 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.