“There’s a view that US cash rates will peak towards the end of next year somewhere between 2.5% and 3%.
“So a lot of hikes are priced in, which means if you buy a bond today, you’re getting all those future cash rate hikes implicit in the price.
“This is an important point to make to people. Bonds don’t sell off once rate hikes begin, they sell off well in advance.
“Often by the time rate hikes are actually beginning, bonds are close to peaking,” says Pendal’s head of government bonds Tim Hext.
“There’s been a good case for being underweight bonds over the last couple of years because yields really were just far too low, given inflation. And yields even outside of inflation – which we call a real yield – were negative.
“Right now, though, we’re back to positive real yields – in Australia anyway and the US is starting to get there. And inflation expectations are quite high.
“I would suggest people who are underweight bonds should at least be looking to get back to their benchmark, or what they consider neutral in a balanced portfolio.
“I wouldn’t be going overweight bonds yet because I think this has a bit more to play out and you might see some better levels.
“But certainly bonds will at some stage perform at a strong defensive task for your balanced portfolio.
“It’s early days, but certainly I would be back to neutral in my allocation to bonds right here.”
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Pendal’s Income and Fixed Interest funds
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.
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