Australian bond portfolios should continue to offer the best risk adjusted returns, as well as defensive qualities, compared to other developed market bond portfolios, such as the US, Eurozone and Japanese global bond markets.
This is because Australian bonds still offer relatively higher yields, a stable outlook for monetary policy and credit market that has higher quality constituents, suggesting less defaults and less credit migration risk, according to AMP Capital Global Fixed Income Head of Macro, Ilan Dekell.
The Global Fixed Income team’s view is that the Reserve Bank of Australia will keep interest rates on hold at the low level of 1.5% for at least another year, which is supportive of duration within an Australian fixed income portfolio.
“You compare that to globally where the risks are either that valuations are simply expensive or the outlook is for an ongoing push higher in interest rates,” Dekell told investors at the recent AMP Capital Global Fixed Income Investment Forum.
“Then if you look at Australia relative to that global environment, it should outperform as a bond market,” he says.
Yields have been lower than they have been historically, but Australia still offers higher yields than many of its developed market counterparts, on an unhedged basis. Australian 10 year yields are 2.75%, relative to US ten year yields at 2.9%, Japan at 0.04%, Europe at 0.40%, UK at 1.35%, and Canada at 2.25%
“So on a relative basis it’s still attractive to hold Australian bonds as your defensive asset class,” he says.
In terms of major countries that are equally attractive, the US is the strongest.
“US is in a similar position where it’s also attractive, so we are now competing with the US for funds.”
“But we are still attractive versus countries such as Japan and Europe and therefore you have this duration buffer in a negative environment that is supportive for Australian bonds,” he says.
The other aspect is that Australia has a higher grade, higher quality, index in terms of the credit universe, because it has a higher average credit rating.
“Therefore in an environment where credit spreads widen, the Australian credit universe should outperform,” Dekell told investors.
While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.
This article is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.