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

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.

Why bonds are worth considering even as rates rise

Bonds have the potential to provide a positive investment return even during central bank rate-hiking cycles. Pendal’s OLIVER GE explains how

RATES go up, bonds go down. It’s an investing truism that has become ingrained in our thinking.

But what if, in fact, bonds had the potential to provide an investment return during central interest rate hiking cycles?

That’s the finding from research by Oliver Ge, a portfolio manager with Pendal’s Income and Fixed Interest team.

Monetary policy tightening cycles are actually kinder on bonds than people believe, Ge says.

“The key is that it depends on how much is priced into the bond market at the point central banks start lifting rates.

“Looking at history, an investor who buys bonds at the moment of the first rate hike in a cycle and sells at the last rate hike actually gets quite a substantial return.”

The finding demonstrates that there is a lot more nuance to the classic doctrine of “rates go up, bonds go down”, says Ge.

Since the 1990s there have four rate hiking cycles in Australia, each averaging an increase of 2.25 per cent to the RBA’s policy rate, he says. The annualised bond return over the same period was more than 4 per cent.

“The compelling story is don’t ignore bonds when rates are rising — they can still give you mid-single digit returns.

“That’s quite significant in a market where equities are negative.”

Find out about

Pendal’s Income and Fixed Interest funds

The explanation for why bonds had positive returns over those times is based on two factors, he says.

First, rate hikes do not materialise unannounced. The RBA broadcasts its decisions in advance and a considerable portion of future hikes are already in the price of the bonds before the first hike.

This means a 25 basis points move higher rarely translates into a direct one-for-one change in the yield of a bond, says Ge.

“During the 2009-2010 cycle, the RBA moved the policy rate up by 175 basis point from 3 per cent to 4.75 per cent. Over the same horizon, a five-year Commonwealth government bond moved up by around only 35 basis points,” he says.

The second thing is the pace of rate hikes. In principle, the more gradual a central bank tightens, the more income a bond can accrue to offset would-be losses, says Ge.

By magnitude, the largest tightening cycle over the last 30 years was 300 basis points, but it occurred over a six-year window, allowing bonds to maintain mid-single digit returns per annum despite the absolute quantum of moves.

“Right now, the market expects the RBA to kick off their hiking cycle in June, ending in mid-2024 at a peak rate north of 3 per cent.

“This puts the expected bond experience somewhere between the last two hiking cycles, both of which resulted in a positive outcome for fixed income investors.

“While a negative shock can’t be ruled out, the likelihood of further inflation surprise is diminishing.

“There’s already a lot priced into bonds. And it’s reasonable to say that we’re closer to the end of this higher rates move than we are at the start.”


About Oliver Ge and Pendal’s Income and Fixed Interest boutique

Oliver Ge is an Assistant Portfolio Manager with Pendal’s Income and Fixed Interest (IFI) team.

Oliver works on developing and running key quantitative investment models, and acting as trading support for the Income & Fixed Interest team. Oliver received his Bachelor of Commerce (Finance) from the University of Sydney and is also a CFA Charterholder.

Pendal’s IFI boutique is one of the most experienced and well-regarded fixed income teams in Australia. In 2020 the team won the Australian Fixed Interest category in the Zenith awards.

The invests across income, composite, pure alpha, global and Australian government strategies.

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 March 31, 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