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.
Investors shouldn’t automatically assume the inclusion of bonds in a portfolio provides diversity against their equity exposure, as correlations can change in volatile markets.
The major global bond index currently offers a yield of only 1.6% at a time when a rising rate cycle may be starting. There are better risk-return opportunities elsewhere.
Exposure to bonds in the last few decades has delivered strong returns, but the risks in simply buying a bond index are acute and investors should consider different ways of investing in bonds.
Continuing our look at ‘safe havens’, gold and bank deposits are often considered alternatives to ‘risky’ shares. How have they performed in times of stress, and do they rate as long-term investments at other times?
Argentina’s economic history shows there’s no room for complacency, as the markets often lose their ability to judge risks in the wild search for performance.
A sign that the strong credit cycle is ending is the funding of some emerging market governments that are more than likely to default, but demand is driven by desire for yield regardless of risk.
With the 35-year bull market in bonds coming to an end, passive fixed interest portfolios are at the mercy of the index’s high levels of interest rate risk and compositional skew towards low return investments.
With the strongest defensive assets earning close to zero and negative real returns, investors are looking at other ways to shock-proof their portfolios, but it invariably means taking on more risk.
The reality of investing in a bond is that regardless of whether we have experienced a massive bull market, the most a bond is worth at maturity is the face value.
Investors need to know the interest rate duration of their fixed income portfolios and its impact on the capital value of their portfolios ahead of potential rate rises.
We can expect a long bond yield rise of the magnitude we’ve seen in 2016 on average every three years, but that doesn’t ease the pain of capital losses in the last six months.