AUSSIE bonds are “somewhat unique in the world” right now, argues Pendal’s head of multi-asset Michael Blayney.
“Our 10-year bonds are yielding more than the cash rate — whereas most other major markets have a strongly inverted yield curve,” he says.
An inverted yield curve is when short-term rates are higher than long-term rates. It’s historically associated with expectations of an economic contraction.
Given the possibility of a slowdown in the global economy, the Aussie bond market is relatively attractive.
“In addition, markets are pricing in inflation in the US and Australia to come back under control.
“And last night’s inflation print in the US was very encouraging, noting of course that it’s still likely we’ll see bumps along the way,” says Blayney.
“From a valuation perspective that makes Australian government bonds attractive.”
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“If the Reserve Bank can get inflation down to 2.5 per cent and you’re getting around 4.5 per cent on ten-year bonds, then that’s a pretty attractive low-risk rate,” Blayney says.
The difference in yield curves between Australia and the US is partly due to the transmission mechanism of monetary policy, Blayney explains.
“In the United States, lots of corporates have fixed-rate debt and home-owners have fixed-rate mortgages.
“In Australia there is more variable rate debt, and the monetary policy transmission mechanism is much faster.
“That’s one reason why the Reserve Bank hasn’t been as aggressive as the US Federal Reserve in this tightening cycle.”
That’s meant the local benchmark rate — the cash rate — is now below the US’s Fed Funds Target Rate.
“That’s unusual. It doesn’t happen that often,” Blayney says.
“And it has other consequences. It’s one of the reasons the Aussie dollar is trading at 65 US cents.
“If a global investor can get a higher rate in US dollars than Aussie dollars, and the US is a safe haven, then that’s where they’ll put their money.”
Michael Blayney leads Pendal’s multi-asset team. Michael has more than 20 years of investment management and consulting experience. He was previously Head of Investment Strategy at First State Super and head of Diversified Strategies at Perpetual.
Pendal’s diversified funds provide investors with a variety of traditional and alternative asset classes and strategies.
The team — which also includes Allan Polley — manages our multi-asset portfolios with a focus on strategic asset allocation, active management and tactical asset allocation.
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