Bonds, Economy, Investments

Bonds favourable over term deposits

Bonds Term deposits Recession Interest rates

Continued higher levels of inflation and the possibility of a recession in the immediate future make bonds a better proposition than term deposits.

A global wealth manager has advised it is more prudent to invest in bonds as opposed to term deposits given the pervading economic conditions and has dispelled the myth around comparative risk.

“[Investing in term deposits] means you’re stuck in that investment for [the agreed term and] you have no flexibility to exit that investment and reinvest at a higher [interest] rate when those opportunities present. In a period where we think we’re going to see more volatility, being more flexible and having wider opportunities is much more advantageous to achieving your investment objectives,” Schroders Australia multi-asset fund manager Adam Kibble said.

In a similar vein, Schroders Australia deputy head of fixed income Kelly Wood said the expectation of an economic recession in the immediate future makes the case for portfolio allocations to fixed income instruments more compelling.

“If we look at the cash versus bond argument, we all know that valuation has been restored across the fixed income universe, but we are now in an environment where the cycle is turning in favour of bond market outperformance,” Wood noted.

“There’s a possibility that we do end up in recession and that’s when fixed income can really play an important part in client portfolios.”

She pointed out this will be the case regardless of the potential recession’s severity.

“Even in an environment of a soft landing, and this is where we can take reference to the 1990s where the US [Federal Reserve] did engineer a soft landing and we saw rates move up [by] 400 basis points and over the [following] four to five years yields come down by the same amount and over that period fixed income in general double-digit returns for the [subsequent] five years,” she said.

“So even in a soft landing environment we can see bond market outperformance versus cash.”

Kibble also suggested investors should not consider term deposits to be completely risk-free.

“I don’t think it is right to say there is no risk in a TD (term deposit) [because] if you need to break the TD and exit earlier, the bank will in effect take some capital from you, which is in effect the impact [of the TD’s] duration being taken into consideration plus a break cost as well,” he said.


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