Markets have now anticipated a lot of rate hikes over the next year or two. How does that affect bond-buying decisions today?

Pendal’s head of government bond strategies TIM HEXT explains in this fast podcast.

Edited excerpt:

"There's a view that US cash rates will peak towards the end of next year somewhere between 2.5% and 3%.

"So a lot of hikes are priced in, which means if you buy a bond today, you're getting all those future cash rate hikes implicit in the price.

"This is an important point to make to people. Bonds don't sell off once rate hikes begin, they sell off well in advance.

“Often by the time rate hikes are actually beginning, bonds are close to peaking,” says Pendal’s head of government bonds Tim Hext.

“There's been a good case for being underweight bonds over the last couple of years because yields really were just far too low, given inflation. And yields even outside of inflation – which we call a real yield – were negative.

"Right now, though, we're back to positive real yields – in Australia anyway and the US is starting to get there. And inflation expectations are quite high.

"I would suggest people who are underweight bonds should at least be looking to get back to their benchmark, or what they consider neutral in a balanced portfolio.

"I wouldn't be going overweight bonds yet because I think this has a bit more to play out and you might see some better levels.

"But certainly bonds will at some stage perform at a strong defensive task for your balanced portfolio.

"It's early days, but certainly I would be back to neutral in my allocation to bonds right here."

Find out more about Pendal’s fixed interest strategies at https://pend.al/fixedinterest.

Pendal is an independent, global asset manager. Find out more at www.pendalgroup.com.

Markets have now anticipated a lot of rate hikes over the next year or two. How does that affect bond-buying decisions today?
Pendal&rsquo;s head of government bond strategies TIM HEXT explains in this fast podcast.
Edited excerpt:
"There's a view that US cash rates will peak towards the end of next year somewhere between 2.5% and 3%.
"So a lot of hikes are priced in, which means if you buy a bond today, you're getting all those future cash rate hikes implicit in the price.
"This is an important point to make to people. Bonds don't sell off once rate hikes begin, they sell off well in advance.
&ldquo;Often by the time rate hikes are actually beginning, bonds are close to peaking,&rdquo; says Pendal&rsquo;s head of government bonds Tim Hext.
&ldquo;There's been a good case for being underweight bonds over the last couple of years because yields really were just far too low, given inflation. And yields even outside of inflation &ndash; which we call a real yield &ndash; were negative.
"Right now, though, we're back to positive real yields &ndash; in Australia anyway and the US is starting to get there. And inflation expectations are quite high.
"I would suggest people who are underweight bonds should at least be looking to get back to their benchmark, or what they consider neutral in a balanced portfolio.
"I wouldn't be going overweight bonds yet because I think this has a bit more to play out and you might see some better levels.
"But certainly bonds will at some stage perform at a strong defensive task for your balanced portfolio.
"It's early days, but certainly I would be back to neutral in my allocation to bonds right here."
<a href="https://www.pendalgroup.com/products/asset-class/australian-fixed-interest-funds">Find out more about Pendal&rsquo;s fixed interest strategies at https://pend.al/fixedinterest.</a>
Pendal is an independent, global asset manager. <a href="https://www.pendalgroup.com/">Find out more at www.pendalgroup.com.</a>

Perpetual Group is an international asset manager including boutiques such as Perpetual, Pendal, Barrow Hanley, Regnan and Trillium. Each week our portfolio managers share the most interesting things they've heard from CEOs, industry leaders and analysts.

Perpetual Group is an international asset manager including boutiques such as Perpetual, Pendal, Barrow Hanley, Regnan and Trillium. Each week our portfolio managers share the most interesting things they've heard from CEOs, industry leaders and analysts.

Advertisement