Bonds – The bond market: back from the dead

To unashamedly paraphrase Mark Twain’s famous quip, reports of the death of the bond market are greatly exaggerated. Despite low starting yields, and in our view, poor valuation support, Australian fixed income has returned a healthy 3.6% year-to-date. While of course that’s good news for investors in Australian debt, there are several troubling aspects to this performance. Firstly, it’s because of lacklustre macroeconomic outcomes, in spite of unprecedented central bank stimulus. Meanwhile, inflation trends are generally weak, in spite of poor productivity performance. This should be concerning for those investors with growth heavy portfolios. Secondly, equities and credit have rebounded sharply from early year losses, but there has been no material retracement of the downward move in bond yields that occurred. Lastly, since the current performance of bonds is likely to be a pull-forward of future returns, it both reduces future expected returns and increases the risk around them. These things said, bonds have again proved their effectiveness and justified their continued inclusion in diversified portfolios. We explore these three themes in “The bond market: back from the dead” (VIEW LINK)