Contrary to historical norms, Australian sovereign bond yields are trading below those in the US. What are the implications for hedging and returns from bonds and will the differential be sustained?
Bonds have performed well for most of the last 30 years with a tailwind of easing liquidity, but the current high prices makes them vulnerable to losing their protective qualities.
Many investors who hold offshore securities do not realise that much of the return comes from the FX hedge rather than the asset itself. And now US rates have risen, the benefit for Aussies has turned around.
Bond investing is not only buy and hold and traditional return sources such as income, changing yields and duration. Relative value identifies market inefficiencies and uses risk management techniques in all market conditions.
Many experts expected the Aussie dollar to fall rapidly when US rates rose above Australian rates, but the fall has been modest. What factors are holding it up and what’s the outlook?
The fundamentals point toward bankruptcies of major sovereigns like the US and Japan in the next decade. The after effects could be catastrophic on all major asset classes. It’s time to discuss the makeup and costs of insurance.
The wholesale market, accessible for retail investors via managed funds (including ETFs and LICs) offers better cash yields than bank term deposits but at a higher risk. This risk can be managed via a diversified portfolio .
This wide-ranging interview with Pilar Gomez-Bravo, Director of Fixed Income at MFS Investment Management, covers the role of active management, the low rate environment, portfolio creation and asset class correlations.
The high yield debt market is now much larger and riskier than just before the GFC. That doesn’t bode well for when the next downturn happens and investors have several options to de-risk.
The bank bill/OIS swap rate may seen arcane but if it stays at current elevated levels, it may increase rates for borrowers in the same way as an increase in cash rates by the Reserve Bank.
Factors relating to technical adjustments, timing of bank reporting and offshore influences have created wider spreads on bonds and hybrids which should mean revert in time.
Market fundamentals are pointing toward an era of high volatility and lower returns, which have not been factored into current prices. Better to wait till there is blood in the streets rather than be fully invested.
It’s not long ago when Australian bond rates were well above US bond rates, and now they are the same in the 10 years. Factors affecting Australian monetary policy will not mirror US rises through 2018.
Many retail investors have turned to unrated or high-yield corporate bonds in recent years, but conditions have been favourable. Watch for the once-a-decade spikes in default rates.