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Why the bond market is telling us to be worried 

October 13, 2015

Jonthan Shapiro, The Sydney Morning Herald

The debate about whether the bond market is actually "smarter" than the equity market has raged for decades. But during a long and distinguished career in investment management, Mark Burgess studied to find an answer.

 "It turns out the bond market is smarter. It tends to see things a little earlier," he said at a panel discussion in Melbourne last week hosted by boutique bond fund Jamieson Coote Bonds.  

So what does the bond market see now? Government bond rates are stubbornly low but more worryingly, credit spreads, a measure of corporate default risk, are on the rise especially in certain sectors.    

"There's excess supply in the system and a lot of people have borrowed in areas where there is excess supply. Supply surges are very dangerous and can kill an industry, and we're seeing that in commodities. We saw it [recently] in shipping, which got swamped by capacity."

Burgess, who ran Australia's sovereign wealth fund the Future Fund from 2012 to 2013, sits on JCB's advisory board along with esteemed economist Saul Eslake, who joined Charlie Jamieson of JCB to discuss an important moment in financial-markets history in front of a gathering of investors and advisers. 

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