Tim Hext: RBA the most dovish central bank? Now there’s a change. | Pendal Group
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Tim Hext: RBA the most dovish central bank? Now there’s a change.

It looks like investors believe the RBA is wrong on its inflation outlook — and they could be right, says Pendal’s Tim Hext

MARKETS and most central banks have spent most of October talking about higher inflation and potential or actual rate hikes.

The RBNZ hiked in early October (delayed from August). The Bank of England looks like moving soon. The US Fed have signalled likely hikes in H2 2022.

Only the RBA is holding their line from earlier in the year — they see no need to hike until 2024. Inflation may creep higher but they don’t see it hitting their 2.5 per cent target until 2024.

Usually on the hawkish end of the spectrum, the new RBA is firmly down the dovish end.

So which market has seen the biggest move higher in five-year bond yields over the last month?   

Australia.

Even this week the RBA did not change sentiment in their minutes. I suspect they are even more perplexed by recent moves than us.

Whenever things like this happen we try and find a rational explanation. Often it isn’t rational but here goes.

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Pendal’s Income and Fixed Interest funds

The first one is duration positioning, which was longer in Australia than others because of RBA rhetoric. Painful stops have been apparent.

The second one is the market thinks the RBA will revert to previous modus operandi and hike before inflation reaches its target.

This would be wrong. The RBA knows its credibility is on the line and Governor Lowe has been at pains to say there will be nothing pre-emptive this cycle.

For economic reasons the only explanation may be that the market thinks the RBA is wrong on its inflation outlook.

On this one I agree. I think inflation will hit their target in 2022 and hikes will follow in early 2023.

On our portfolios we remain overweight inflation bonds where we can.

We have covered duration shorts and current levels leave us considering whether there is value in short-end yields.

Long-end yields however will need to see 2% before we ask the same question.



About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here


About Pendal Group

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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