When it comes to bonds, keep an eye out for duration

Australian Government Bonds can provide investors with income stability, security and diversification. However, with uncertainty surrounding interest rate movements, it’s wise to look at duration before parking your money into one basket.

That’s why VanEck has recently launched three Australian government bond ETFs, to help advisers and investors access different maturity profiles, enabling them to adjust their duration.

In this video, John Caulfield, Director, Intermediaries and Institutions at VanEck Australia talks about the new ASX: 1GOV, ASX: 5GOV and ASX: XGOV bond ETFs and how they can be used in a portfolio’s strategic allocation.

Edited transcript

VanEck recently launched three new Australian sovereign bond ETFs, 1GOV, 5GOV AND XGOV. Why are you bringing these products to the market now? 

Caulfield: Australian government bonds weren't an asset class that we offered to investors, so it was a natural addition to the product suite. VanEck likes to be quite innovative. We like to be quite forward looking in terms of our product development. This is an Australian first in terms of providing investors some choice. 

You don't necessarily want to be invested across the entire curve. Markets are quite uncertain. The shape of the curve is a little bit unusual at the moment, whilst we work out this whole rate hike versus inflation equation. Allowing investors to target specific maturity buckets, the products provide more flexibility. 

What are you seeing across the landscape that gives you confidence about launching these now?

Caulfield: If you cast your mind back two, three years, Aussie government bonds were probably paying you 50 basis points. The various buckets (ASX: 1GOV, ASX: 5GOV, ASX: XGOV) now range between 4.2-4.9%, so at least you are getting paid to own these sorts of securities, whereas previously you might as well have just put money in the bank. There's yield on offer, but the fact that rates are up, and yields are higher than they were means bonds will behave contra to equities and, and be a bit more of a diversifier, an uncorrelated asset, compared to risk assets or predominantly what people have been forced to own for income in in previous years.

Why do you think flexibility is so important for investors right now?

Caulfield: Strategically there's always a place for Australian government bonds in the portfolio. What investors want now is flexibility to say, " I want to focus on the front and the middle or the middle and the end parts of the curve."

Everyone will be coming at this from a different perspective, a different starting point based on what their fixed income portfolio looked like as a result of the last 18 months and, and the rate hikes. Having that ability to be quite specific on that duration piece is important. 

Aussie government bonds deserve a strategic allocation. Now you just have a little bit more flexibility and can be a bit more nuanced around how you bring that in. 

How do you determine the balance between Federal and State treasuries?

Caulfield: We focused on the government or quasi government market. If you look at a composite bond index, generally you'll have corporate bonds in there as well. With corporate bonds come different risks, credit risk and so on. Just sticking to the Aussie or semi-government sector, focuses in on a very specific part of the broader asset class and gives you a little bit more on that duration side to play with as well.

Access a portfolio of Australian government bonds which have maturity dates between 1 and 20 years with 1GOV, 5 GOV and XGOV

ETF

Vaneck 1-5 Year Australian Government Bond ETF (1GOV)

Australian Fixed Income

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ETF

Vaneck 5-10 Year Australian Government Bond ETF (5GOV)

Australian Fixed Income

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ETF

Vaneck 10+ Year Australian Government Bond ETF (XGOV)

Australian Fixed Income

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