Invest
Are bonds still worth buying in 2017?
Questions still surround Donald Trump and the prospect of further political upsets cloud the outlook for global markets, but are Australian bonds still an attractive option for investors?
Are bonds still worth buying in 2017?
Questions still surround Donald Trump and the prospect of further political upsets cloud the outlook for global markets, but are Australian bonds still an attractive option for investors?
In the last days of 2016, two sources of potential instability overshadowed financial markets – the rise of US protectionism under the Trump presidency and the spread of populism through pending plebiscites in Europe.
Australia is exposed given its trade dependence on China, the US and the EU. However, what is bad for economies might be good for bonds.
As we look ahead to in the new year, here are five reasons for investors to consider the safety of Australia’s liquid, high-quality debt market.
1. Reflation rethink on risk
Financial markets have been pricing in US reflation in the belief that Mr Trump will cut taxes and spend on infrastructure.
If he follows through, we could see a huge reversal in asset allocation, ending the lower for longer narrative that prolonged a multi-year rally in credit spreads.
Australia would not escape the bond sell-off. But we believe the recent spike in US yields should be viewed differently to 2013 (‘taper tantrum’) and 2015 (‘bund tantrum’).
Those surges were premised on a pullback in central bank accommodation, not a supply side shock to growth. If government yields keep rising, we expect global, including Australian, credit spreads to tighten.
Given that investors would then be getting less yield enhancement from the credit risk they are taking, the appeal of Australian government bonds should grow.
2. Hedging Trump volatility
Among his more bellicose electioneering statements, Mr Trump threatened to label China a currency manipulator and impose 45 per cent tariffs on Chinese imports.
This would have a negative impact on global growth and productivity, given that China would likely respond with protectionist policies of its own.
Such a scenario would hurt the growth prospects of both nations, which as Australia’s largest and third-largest trading partners would augur badly for businesses on these shores.
The likelihood the Australian government and/or central bank would launch fiscal expansion and loosen monetary policy would rise as the nation’s growth prospects darkened. Australian bond yields would fall as equity markets suffered. Amid rising volatility, the case for investing in Australian government bonds would strengthen.
3. Shelter from China uncertainty
The surge in commodity prices buoyed by China’s seasonal industrial upswing could come unstuck as Beijing seeks to curb an overheated property sector.
Any slowdown in property and infrastructure investment would hurt Australia in trade terms and could spark a flight to safety, but a more imminent risk is that Beijing can’t contain capital outflows.
These started last year after authorities widened the renminbi’s (RMB) trading band so it could be included in the International Monetary Fund’s Special Drawing Rights currency basket.
China has already imposed capital controls to prevent large offshore transfers, but this has only slowed the trend, not halted it. Facing a strengthening dollar and hawkish Federal Reserve, we can expect the RMB to depreciate further, driving outflows.
That raises the prospect of drastic government intervention, such as a one-off devaluation or freeze on repatriation of foreign investments. This could prompt a flight to safety, and to Australian government bonds.
4. Undermining commodities impact
We don’t see Mr Trump’s agenda to spend on infrastructure as a catalyst for a surge in commodity prices. It’s China’s efforts to stimulate its economy via infrastructure investment, as well as supply cuts to key commodities, that lie behind the rally in coking coal and metals such as iron ore.
Bulk commodities are already trading well above marginal cost and China has begun curbing supply cuts to coal production as prices have risen faster than anticipated.
Mr Trump’s support for increased oil and gas drilling on US federal land may stymie co-ordinated production cuts from OPEC as new supply and competition emerges, but it is premature to suggest recent commodity price movements will cause S&P to shy away from cutting Australia’s AAA sovereign rating.
Even if the AAA rating is lost, we would not see that as a major deterrent of foreign interest in Australian government bonds – relative yield remains the key attraction.
5. Property cool down lends support
Years of strong growth and low interest rates have fanned a belief that Australia’s property market is a bubble about to burst, but this fails to take regional differences into account.
While east coast prices have soared, Perth is seeing sharp declines underpinned by weakness in the mining sector. Meanwhile, there are concerns about apartment oversupply in Brisbane and Melbourne.
Overall, the rise in house prices has affected affordability, while banks have pulled back on lending. Therefore, we expect price growth to slow and the Reserve Bank of Australia to leave rates unchanged for some time.
Lowering rates could fuel demand for housing at a high point in the cycle and risk inflating a bubble. A stable cash rate supports investment in bonds and raises the relative appeal of Australian government bonds globally.
Nick Bishop, head of Australian fixed income, Aberdeen Asset Management
Bonds
Corporate bond market review makes 12 recommendations to enhance investment
Twelve recommendations have been made to support the development of a more active corporate bond market in Australia. ...Read more
Bonds
Common mistakes in buying bonds that investors should avoid
The bond market is considered as a safe haven for Aussie investors and it’s easy to see why. ...Read more
Bonds
Student files lawsuit over government bonds
A 23-year-old student has filed a lawsuit against the Australian government after alleging that it failed to disclose climate change-related risks to investors in the country’s sovereign bonds. ...Read more
Bonds
Bonds in the ‘new normal’ – navigating a recession
Dampening downside risk during a global economic downturn requires active management and informed decisions, writes Justin Tyler. ...Read more
Bonds
Buyers beware of silent risks in bond markets
Investors are being urged not to fall into the trap of buying inferior-quality bonds in a low-yielding environment, despite the promises of higher returns, an industry expert has warned. ...Read more
Bonds
Reasons to invest in government bonds
Many investment experts recommend adding government bonds to an investment portfolio in order to reap its benefits while limiting risks and losses. ...Read more
Bonds
What is credit investing and how does it work?
A well-diversified investment portfolio typically includes credit investments to balance risk and return. Here’s what you need to know about credit investing and how it works. ...Read more
Bonds
Blockchain bond sees $50m boost
The first bond to be created, transferred and managed through its life cycle using blockchain technology has received a new funding boost. ...Read more
Wrapping up an eventful 2021
Listen now
What Omicron means for property, and are units right for first-time buyers? What is equity crowdfunding? Are industry super funds tapping into member funds to save their skins?
Listen now
Will housing affordability improve in 2022? Will buy now, pay later become the norm? Why are Aussies staying in failing super products?
Listen now
Who really benefits from crypto ETFs? How will the RBA respond to rising inflation? Could a mandate help address unpaid super?
Listen now
Bonds
Corporate bond market review makes 12 recommendations to enhance investment
Twelve recommendations have been made to support the development of a more active corporate bond market in Australia. ...Read more
Bonds
Common mistakes in buying bonds that investors should avoid
The bond market is considered as a safe haven for Aussie investors and it’s easy to see why. ...Read more
Bonds
Student files lawsuit over government bonds
A 23-year-old student has filed a lawsuit against the Australian government after alleging that it failed to disclose climate change-related risks to investors in the country’s sovereign bonds. ...Read more
Bonds
Bonds in the ‘new normal’ – navigating a recession
Dampening downside risk during a global economic downturn requires active management and informed decisions, writes Justin Tyler. ...Read more
Bonds
Buyers beware of silent risks in bond markets
Investors are being urged not to fall into the trap of buying inferior-quality bonds in a low-yielding environment, despite the promises of higher returns, an industry expert has warned. ...Read more
Bonds
Reasons to invest in government bonds
Many investment experts recommend adding government bonds to an investment portfolio in order to reap its benefits while limiting risks and losses. ...Read more
Bonds
What is credit investing and how does it work?
A well-diversified investment portfolio typically includes credit investments to balance risk and return. Here’s what you need to know about credit investing and how it works. ...Read more
Bonds
Blockchain bond sees $50m boost
The first bond to be created, transferred and managed through its life cycle using blockchain technology has received a new funding boost. ...Read more
More articles
Website Notifications
Get notifications in real-time for staying up to date with content that matters to you.
