The big risk to corporate bonds

Every Monday, the team at Market Matters answers a number of questions from our subscribers. Today’s question is… “In today's Morning Report you talk about the danger in the bond market. I have a portfolio of commercial bonds from FIIG which is returning me about 7% pa. These are mainly unrated bonds issued by Australian companies, both fixed coupon and floating rate. If the bond bubble pops as you predict, are Australian issued commercial bonds also likely to crash?" Read our response to this question below.
Nicholas Forsyth

Market Matters

Hi Ross, an excellent, very topical question. We can only talk generally around bonds, but corporate bonds are clearly as strong as the companies issuing them. A 7% yield sounds wonderful in today's climate if you are comfortable with the risks they carry.

A large job that global central banks face moving forward, especially the Fed at present, is how to raise interest rates slowly, without stopping economic growth and panicking the bond markets.Our medium-term view for equities suggests they may struggle.

Australia's rates are sitting at an all-time low of 1.5%. Currently, our economy is not demonstrating the same strength as the US, who is likely to raise rates in 2016.

The RBA Cash Rate Monthly Chart

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When we look at our 3-year bonds on a long-term basis, they continue to rally in a clear "rising wedge" structure - a very negative formation, technically. When / if this cracks to the downside, it’s likely to be aggressive, taking all bonds lower on a simple relative value basis - probably our simple answer Ross.

Australian 3-year Bonds Quarterly Chart

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Nicholas Forsyth
Nicholas Forsyth
Director
Market Matters

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