Do rising bond yields threaten the share market?
There was something of an equity market correction recently as U.S. Treasury yields and longer-term Australian Government bond rates have surged since reaching all-time lows last November.
With the U.S. economic outlook boosted by the improvement in the Covid-19 pandemic situation, vaccine rollout underway and President Biden’s fiscal package expected to get through the Congress in the weeks ahead, despite Republican opposition, investors are now focusing on the risk of higher inflation and potential economic overheating. This led to a spike in US Treasury yields, challenging the low-rate environment that is generally believed to be an important reason for the equity rally since March 2020, especially in technology stocks.
In Australia, not only has the AUD risen strongly, having reached US$0.80 recently, but longer- term interest rates have risen significantly as in the US. While our short-term rates have stayed low due to RBA purchases, the 10-year bond rate touched 1.90%, but has fallen back as the RBA reiterated its desire to keep rates down and indicated it will purchase more bonds at maturities beyond 3 years to ensure that happens.
There is no doubt that if interest rates were to rapidly increase from here there is a strong probability that the share market would suffer a significant correction. However, Central Banks are focused on promoting employment growth and have signalled that they will do what is necessary to keep rates down so the likelihood of a major disruption caused by rising interest rates is low.
Also, for borrowers, mortgage rates are likely to stay very low for some years.
In the medium term as economies hopefully recover, some rise in interest rates is very likely. If the increases occur in a slow and measured fashion, there should not be any significant fallout for share markets.
Indexation of the Transfer Balance Cap
The transfer balance cap, which is the limit on the amount with which a tax-free pension can be commenced, is currently $1.6 million. From 1 July 2021, it will be indexed to $1.7 million.
The ATO says that when the general transfer balance cap is indexed to $1.7 million, there won’t be a single cap that applies to all individuals. Every individual will have their own personal transfer balance cap of between $1.6 and $1.7 million, depending on their circumstances.
If you start a retirement phase income stream for the first time on or after 1 July 2021, you will have a personal transfer balance cap of $1.7 million.
If you had a transfer balance account before 1 July 2021, your personal transfer balance cap will be:
- $1.6 million if, at any time between 1 July 2017 and 30 June 2021, the balance of that account was $1.6 million or more.
- between $1.6 and $1.7 million in all other cases, based on the highest ever balance of your transfer balance account.
The Australian Tax Office (ATO) has also announced an increase in both the Total Superannuation Balance (TSB) cap, which impacts the eligibility to make contributions. The change will apply to those seeking to make further contributions, increasing the threshold at which you can still make non-concessional contributions from $1.6 million to $1.7 million.
Super Contribution Rules – A Refresh
Each individual below age 67 has two annual caps that limit how much they can contribute to Super each year:
- A concessional contribution cap currently of $25,000.
- A non-concessional contribution cap currently of $100,000.
In addition, some people have the potential to make contributions outside of these caps under the (home) downsizer provisions or the small business CGT concessions.
Since 1 July 2017 the general concessional contributions cap has been $25,000 and is legislated to be indexed in line with average weekly ordinary time earnings (AWOTE), in increments of $2,500. With the announcement of the AWOTE figure for the December 2020 quarter, the concessional contribution cap is set to increase from $25,000 p.a. to $27,500 pa from 1 July 2021.
The non-concessional cap has been $100,000 but due to indexation, the cap will be increased from $100,000 to $110,000 from 1 July 2021.
In addition, the maximum amount a member, who was under 65 at the start of the financial year, can contribute under the non-concessional contribution cap bring-forward rule is also set to increase from $300,000 to $330,000 from 1 July 2021.
It is important to note that the proposal announced in the 2019 federal budget to extend access to the bring-forward rule to people under age 67 is not yet law. Therefore, only persons who are aged under 65 at the beginning of the financial year will be eligible to trigger the bring-forward rule.
If you trigger the 3 year non-concessional bring forward rule before indexation occurs in July, your maximum limit for the 3 years will remain at $300,000. It will not be increased by subsequent indexation.
Any non-concessional contributions will also need to be tested against the contributor’s total super balance as at the previous 30th June.
Personal contributions can be made, without satisfying the work test, up to the member’s 67th birthday. From age 67 the minimum work test of 40 hours in 30 consecutive days must be met. No further personal contributions can be made from age 75.
The importance of Asia, particularly China, in world trade
It is well known that Asia, and China in particular, has been growing more rapidly than the US & Europe for several decades now and this is reflected in trade volumes This chart shows the world’s highest-volume container ports in 2005 vs. 2019. This is the result not just of globalization but regionalization as well with much of the trade happening within Asia. Trade wars between China and the US, Australia and other countries may slow overall growth but Asian dominance is likely to increase as their economies grow faster than western countries.
This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.