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.
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