Gross’s Co-Manager Sees RBA on Hold, Wary to Follow Fed Toward Zeroby and
Palghat sees RBA striving to determine what neutral rate is
Favors corporate credit over sovereigns for additional yield
The Reserve Bank of Australia is unlikely to ease monetary policy again this year as it seeks to avoid the struggles major peers are having with interest rates near or below zero, according to bond fund manager Kumar Palghat.
The Australian central bank, which this week opted to keep its cash benchmark unchanged at 1.75 percent following a cut in May, will stand pat as it tries to understand what the so-called neutral interest rate should be for the nation’s economy, according to Palghat, who co-founded Kapstream Capital Pty Ltd. and assists Bill Gross as a co-portfolio manager at Janus Capital Group Inc.’s Global Unconstrained Bond Fund.
“My guess is they’ll be on hold for the rest of the year, at least six-to-nine months, simply because they need to figure out the transmission mechanism of lower rates,” said Palghat, who oversees the equivalent of about $7.8 billion as chief investment officer at Kapstream, where his investments would benefit if Australian bonds extend the rally that sent 10-year yields to a record low this week.
Palghat’s view differs from the swaps market, which on Thursday was pricing in about 21 basis points of additional easing over the coming six months. While the RBA’s benchmark is still far above the European Central Bank and the Bank of Japan’s negative rates, such a reduction would take the RBA a step closer to the kind of unorthodox policies the Federal Reserve is currently struggling to escape from.
“The RBA doesn’t want to end up like the Fed or the ECB or Bank of Japan where you get to zero, get to QE and print money, because we know that from other countries that that experience hasn’t been all that great,” Palghat said in an interview on Wednesday in Sydney.
The U.S. central bank has so far failed to follow up its December increase with more tightening in 2016. While it will continue to test the waters, it probably won’t implement more than one increase before the end of this year, Palghat predicts.
Kapstream has been tied up with the Denver-based asset manager since July 2015, when Janus bought a majority stake in the Australian company and named Palghat to his role with Gross’s fund. Bangalore-born Palghat previously worked with Gross at Pacific Investment Management Co. before he set up Kapstream in 2006.
With uncertainty surrounding the outlook for U.S. monetary policy, China and the U.K. vote on European Union membership, external risks present the biggest challenge to the Australian central bank, according to Palghat.
He reckons that both the cash rate and credit spreads are “fair value” at current levels, although the risk is that the RBA benchmark will be lower rather than higher.
His Australian bond portfolio is currently long duration, or poised to benefit from a decrease in yields. He is also long U.S. duration, but has dialed back that bet as the Fed fuels uncertainty.
With further Australian easing already priced in by the market, the money manager says he’s steering clear of sovereign bonds and favoring securities that offer additional yield such as corporate bonds, bank paper and infrastructure debt. He also holds some notes issued by supranational organizations and Australian state governments for the liquidity that they provide.
“I don’t expect any credit contraction, I don’t expect the RBA to cut rates,” Palghat said. “It’s simply the assets. Any additional spread contraction or fall in rates is simply the icing on the cake.”