The current economic landscape presents an ideal opportunity for investors to diversify their portfolios with corporate and government bonds, a fixed-income specialist has suggested.
FIIG Securities head of research Philip Brown said adopting this strategy aims to capitalise on notably elevated yields within the asset class before anticipated interest rate cuts by the Reserve Bank of Australia (RBA) due to an easing in inflation.
“For the first time in over a decade, bonds are providing investors with equity-like returns for significantly lower risk,” Brown noted.
“For most of the 2010s, the RBA sought to encourage risk-taking by keeping interest rates low. Now, though, following the pandemic disruptions and government stimulus spending, the entire interest rate landscape has changed. To lower inflation, the RBA has taken interest rates very high and bonds provide yields not seen for a decade.
“But that flurry of interest rate rises is now drawing to a close. If the RBA changes tack and lowers interest rates in 2024 or 2025, bonds will increase in value quickly.
“We are currently in a window in which investors can lock in higher yields before the RBA moves, which makes now a great time to add bonds to a diversified portfolio.”
He pointed out extending duration and securing fixed-rate returns for the longer term entailed only limited risk, making bonds especially attractive.
“With yields still relatively high in a medium-term assessment and with the yield curve still steep, the risk for extending duration too early is to receive high yields while we wait for the large upward movement in capital prices,” he said.
“To put it another way, we don’t really see much of a downside to extending duration here.”
To that end, he underscored the attractiveness of state government bonds, which are likely to offer reasonable returns with minimal risk.
Further, he identified corporate bonds, particularly subordinated bank bonds, as an avenue for achieving higher returns in the current market landscape.
''