They’ve experienced a brutal adjustment as yields have lurched to decade highs. Now they’re offering a compelling option to protect and even grow wealth.
. In an uncertain world, it’s logical for investors to seek solace in defensive safe-haven assets, like government bonds.
As markets have adjusted to this reality, long-term interest rates have risen to reflect the view that cash rates aren’t going to come down.
“A higher duration means an investor needs to wait longer for the bulk of the payments and, consequently, the more its price will drop as interest rates rise.” The consequence of higher interest rates is higher long-term bond yields. That in turn hurts interest rate sensitive equities – such as tech stocks and mature reliable companies – that had come to dominate the equity market.
The prospect of further cash rate increases to contain inflation will hurt bonds, while rising uncertainty about where cash rates will land up will lead investors to demand a higher premium to buy bonds.In this scenario, there’s a different type of defensive investment – cash.Since base interest rates are above 4 per cent, investors are earning a decent rate of return from simply parking their money in the bank or investing in a money market fund.
“Floating rate has been the place to be and continues to be a cornerstone for those looking for income consistency and capital stability,” BondAdviser’s Charlie Callan explains. But a 1 per cent fall in interest rates will deliver a 10 per cent gain. The convexity of the bond pay-off favours investors.
“We’re not pounding the table to be massively overweight, but you shouldn’t be on the way to neutral if you’re not already started,” says Pimco’s Rob Mead. Yarra Capital’s Phil Strano says high outright yields up to 8 per cent for some investment grade bonds are pretty “compelling when equity markets are continuing to sell-off”.“The ‘higher for longer’ thematic strengthens the appeal of investment grade credit, since quality corporates are still able to navigate higher funding costs without any meaningful increase in impairment risk.”High-yield bonds and loans tied to riskier borrowers pay double-digit returns.
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