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Tim Hext: Nightmare On Bond St (via Martin Place)

It’s been one of the biggest months in bonds ever. An unravelling expected over six months happened in three days. Pendal portfolio manager TIM HEXT explains what’s going on

SUNDAY is Halloween and I’m tempted to dress up as the bond market.

It’s been a scary month. 10-year yields are up 0.6%. Three-years are up almost 1%. Holders of a Composite Bond Strategy will be down around 5% on what are supposed to be safe investments.

So what happened?

The first reason is globally central banks are talking tapering and potentially higher rates.

The RBA was supposed to be different though. They have been very firm in expressing a willingness to be behind the curve and the need to see both inflation and wages at target (2.5% and 3%).

Even in early October they thought they could wait till 2024 at the earliest. Last week they even bought bonds to support their yield curve control (YCC) at 0.1% for the April 2024.

Then the great unravelling began.

The Q3 underlying inflation numbers came out at 0.7% — above the RBA and market expectation of 0.5%. 

The market was cautious but surely one number would not see the RBA abandon its guidance and YCC?

It seems the RBA has done just that — the final nail in the bond coffin.

Find out about

Pendal’s Income and Fixed Interest funds

Either the RBA is ghosting the market (ask your nearest Millenial if you don’t know what that means) or next Tuesday will bring a massive about turn from the RBA.

Today (Friday) they were noticeably absent.

The April 2024 bond they are supposedly targeting with yield curve control at 0.1% last traded at 0.7%.

And no word. Nothing.

No doubt they are revising up their inflation forecasts to be published next week, which will provide the cover for the change of view.

Radio silence this week though means the market is left to second guess their inaction.

Today has seen another 0.25% sell-off to seal one of the biggest months in bonds ever — and not from the good side.

We expected this to unravel slowly over the next six months. It has happened in three days.

I have always said the RBA is like an oil tanker not a speedboat.

Unless a crisis hits like March 2020 they move slowly and gradually communicate the whole time. I now need a new analogy.

Once the dust settles and momentum slows, bonds will be something we have not seen in a long while — cheap.

However with even the RBA confused and wrong-footed, now is not the time.

On a final note, 10-year real yields are now positive.

If you have deep pockets lock some away. I doubt you’ll regret that one.

About Tim Hext and Pendal’s Income and Fixed Interest boutique

Tim Hext is a portfolio manager and head of government bond strategies for Pendal’s 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.

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