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Here’s why Aussie bonds are looking attractive right now

November 15, 2023

Australian bonds are looking attractive, particularly if inflation can be brought under control, says Pendal’s head of multi-asset MICHAEL BLAYNEY

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.

Why it’s happening

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.”

About Michael Blayney and Pendal’s Multi-Asset capabilities

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.

Find out more about Pendal’s multi asset funds:

Contact a Pendal account manager here


This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current at November 15, 2023. PFSL is the responsible entity and issuer of units in the Pendal Multi-Asset Target Return Fund (Fund) ARSN: 623 987 968. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com.

The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested.

This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation.

The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information.

Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation.

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