Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

Dip a toe in: Bond market bloodbath reopens case for fixed interest

Lewis Jackson  |  29 Apr 2022Text size  Decrease  Increase  |  
Email to Friend

It’s time for income investors to reconsider long-unloved fixed income market as yields on investment-grade bonds surge to multi-year highs, according to analysts from Morningstar and AMP Capital.

After years of treading water near zero, government bonds are offering up yields comparable to sections of the equity market for far less risk. Yields on 10-year Australian government bonds, often used as the “risk-free rate”, are north of 3% for the first time since 2014. US 10 Year Treasury Notes traded at yields of 2.8% on Thursday.

“It’s the most attractive it’s been in five or six years,” says Brad Bugg, head of multi-asset strategies at Morningstar Investment Management Australia.

“For those who had money in cash as opposed to bonds, now is a great time to get that extra pickup. For a retired investor with a lot of money in cash, this is a material increase in income.”

The return of income marks a fundamental change for bond investors accustomed to years of capital gains. Falling interest rates through the Global Financial Crisis and the pandemic buoyed bond prices and squeezed yields to near zero. That trend shifted this year as central banks from the US to New Zealand raised rates to curb inflation and warned more was to come. Investors dumped bonds in response, leaving the US$88 trillion global government bond market nursing record losses last quarter.

The Bloomberg Global Aggregate Index, which tracks investment-grade credit across 24 countries, is down 8.9% this year on a total return basis.

Plummeting bond prices bring the silver lining of rising yields, which move in an inverse fashion. Put differently, a bond’s fixed stream of coupon payments is more valuable the cheaper it is to buy, and vice versa.

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

“It certainly makes the bond market more attractive for investors and the 3% on the ten-year Australian government bond is getting closer to a reasonable yield, says Shane Oliver, chief economist at AMP Capital.

Rising yields have slashed the quantity of negative yielding bonds, falling from US$18 trillion in December 2020 to just US$2 trillion in March.

BetaShares Investment Grade Bond ETF (ASX: CRED) offers a running yield of 3.47% as of Friday, up from 2.9% last September, according to Morningstar data.

For those investors nursing double-digit capital losses in their bond portfolios, Morningstar’s Bugg says the worst thing they can do is sell. Investors who hold should recoup losses over the next few years as fixed-interest funds recycle maturing bonds into newer higher-yielding ones.

“The numbers you might see on a quarterly statement are daunting,” he says. “You won’t lock those in unless you sell that investment.”

Rising yields are also helping improve the case for bonds as diversifiers, adds Bugg.

Bond prices typically rise when equities fall as investors pivot to the safety of government debt amid stock market turmoil. However, with bonds so expensive until recently, there was less room to rise, undermining their value as a diversifier, says Bugg. Today’s higher yields and lower prices could give investors more appreciation in their bond portfolios during future equity downturns.

Getting the timing right

For investors looking to enter fixed interest markets, Mihkel Kase, portfolio manager at the bronze-rated Schroders Absolute Return Income Fund, cautions that this year’s selloff may not be over yet.

While there’s broad agreement across markets that developed-world interest rates are on the rise, the pace and extent are still unclear, he says. If central banks surprise by hiking faster and further than markets expect, selling could return to bond markets.

“Are we done yet with the selloff in bonds or are we expecting to see more?” he asks.

“With valuations back at neutral, it makes sense to start adding some duration to portfolios. But I’m not sure it’s the right time to go boots and all.”

Bond funds Morningstar likes

Bond investing remains a corner of the market where Morningstar believes active managers can outperform. Silver or Gold rated funds include the Janus Henderson Australian Fixed Interest fund and the BetaShares Western Asset Australian Bond ETF. Medallist ratings means analysts have a high conviction the funds will outperform peers and benchmarks.

is a reporter and data journalist with Morningstar. Tweet him @lewjackk or get in touch via email

© 2022 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend