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Michael Blayney: Where Aussie bonds fit into portfolios right now

Global bond markets might not look attractive, but Aussie bonds could be a good fixed interest component for portfolios right now, says Pendal’s multi-asset chief MICHAEL BLAYNEY

  • Inflation a key risk for retirees
  • Balanced portfolios need bond exposure
  • Inflation, bond outlook in Australia better than elsewhere

INVESTING in bonds is challenging in the current economic environment, with inflation and interest rates rising around the world.

But portfolios need diversification — and for investors putting money into fixed income assets, Australian bonds are an attractive option.

That’s because inflation and the prospect of interest rate rises are lower in Australia than the United States.

“If you are constructing a portfolio right now, bonds have relatively low yields and you’re seeing a spike in inflation,” says Michael Blayney, who heads up Pendal’s multi-asset team.

“In the US it’s 7 per cent year-on-year, it’s about 5 per cent in the UK and it’s 3.5 per cent in Australia. That makes it hard to be positive about bonds.”

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So is there any reason for investors to consider being overweight bonds?

“One big reason is geopolitical risk,” says Blayney (pictured above).

If Russia invades Ukraine — it has more than 100,000 troops amassed near the border — bonds would likely benefit from a “flight to quality”.

“US Treasuries would be a pretty good place to be in that case,” Blayney says. “But that would be a short, sharp event, so if an adviser is thinking more strategically, the bigger issue is inflation.”

Managing inflation

Inflation is among the biggest risk facing retirees.

“It erodes a retiree’s purchasing power, and they are no longer earning wages,” Blayney says.

“Higher inflation is also generally bad for other asset prices, such as equities, because it causes bond yields to rise and that raises questions over the lofty valuations of some stocks.

“But the reality is that in a portfolio today you have to position yourself to have some hedges against inflation,” he says.

Returns on cash are almost zero so most investors still need to hold bonds. The question is how overweight or underweight they want to be in the bond market.

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“Whatever their position, investors need to look at what bonds look more attractive,” he says.

That’s where the Australian bond market stands out because the inflation outlook isn’t as severe as many other economies.

“I can buy a German bund [bond] and for the first time in quite a while get a positive yield, but it’s only 0.2 per cent. I can go to the US and get 1.9 per cent, but inflation is seven per cent and I’m reasonably confident that the Fed will hikes rates this year.

“I can go to Australia where I get about two per cent on a ten-year bond, and the inflation rate is much lower. And when the immigration tap turns on again, I know that will relieve some of the pressure on wages, which feeds through to interest rates.

“So, if you want to hold bonds, and balanced portfolios do even if they are under-weight, Aussie bonds aren’t a bad place to be,” Blayney says.

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:

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This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at February 10, 2022. 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. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

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