Hi there! Welcome to the new look Pendal website... Take a two minute tour to see what we’ve changed.

Mainstream Online Web Portal

Investors can view their accounts online via a secure web portal. After registering, you can access your account balances, periodical statements, tax statements, transaction histories and distribution statements / details.
Advisers will also have access to view their clients’ accounts online via the secure web portal.

TIM HEXT: Inflation noise gets louder but real yields move markets

Are bonds a buy? Our head of government bonds Tim Hext offers his view in Pendal’s weekly Income & Fixed Interest snaphot

RATE HIKE expectations turned up another notch last week after a higher-than-expected US CPI and a 75bp lift from the US Fed.

Three-year bonds in Australia rose from 3.12% to 3.62% — another 50bp move. 

To put this in perspective that was more than the entire market range in 2018.

By the end of last week terminal cash rates were priced at 4.25% in mid-2023 and 3.8% by the end of this year.

This is well ahead of even a hawkish RBA’s expectations. Comments from Phil Lowe suggested they were too high even with the expectation of inflation hitting 7% late this year. This saw a small rally today (Tuesday).

Clearly the near-term mission of the RBA is to get back to a neutral 2.5% cash rate over the coming months.

Very little will stop them.

However, the broader debate is just how resilient the household sector — and to a lesser extent the business sector — is to these higher rates.

Find out about

Pendal’s Income and Fixed Interest funds

The RBA quotes higher savings as an important buffer. But it will not be the median household in trouble when mortgage rates hit 5-6%. Mortgage stress will fall on young families with a high propensity to spend — families without any savings buffer.

Bonds a buy?

The question of whether bonds are a buy at 4% is being increasingly asked.

Let’s break it down into inflation and real yields. 

For all the panic and commentary on inflation this last week, market expectations of longer-term inflation have not moved.

In fact a 10-year inflation swap is still at 2.5% — a vote of confidence that the RBA will hit its inflation target across the decade.

The rising nominal yields were all driven by rising real yields. This is not consistent with the view building increasingly in risk markets of a US recession in 2023.

In Australia 10-year real yields are now around 1.65%. This is your risk-free return above inflation… That is, you are protected for inflation plus you get an extra 1.65% and no credit risk.

Sounds quite compelling and real yields are at levels not seen since 2014.

Real yields are supposed to represent the productive capacity of the economy to generate more return from existing resources, meaning borrowers are happy to pay a return above inflation.

Maybe there is a surge in productivity building. There have been some encouraging signs in business investment recently, though higher rates may temper that.

Adviser Sam is invested
in making our world

A better place.

Watch as Sam meets a
mum rebuilding her life
thanks to responsible

The other factor that drives real yields is simply the level of cash rates versus inflation, or the real cash rate.

These are still sharply negative, though on future expectations markets are looking for Fed Funds around 3.5% in a year and forward inflation expectations suggest an inflation rate at a similar level.

In Australia it is harder to see a cash rate well above inflation for at least the next two years, though they may also eventually converge around 3.5% in early 2024.

This all makes real rates look like good medium-term value.

If you buy the market’s medium-term view that inflation will come back into the RBA band, it means bonds above 4% are cheap.

Given moves like the last week of trading this may be hard. But for asset allocators and portfolios underweight bonds it does suggest it’s time to get back to neutral.

If you buy into the whole recession view then clearly it is time to go overweight. But for us, momentum is still problematic in the short term.

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 an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at Jun 21, 2022.

PFSL is the responsible entity and issuer of units in the Pendal Monthly Income Plus Fund (ARSN: 137 707 996) and Pendal Dynamic Income Fund (ARSN: 622 750 734) (Funds). 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

Keep updated
Sign up to receive the latest news and views