While bond markets across the globe are expected to see outperformance, Australian bonds could be six months behind due to higher inflation.
Global bond markets are in a strong position to achieve broad-based outperformance, according to Kellie Wood, Schroders’ head of fixed income, with central banks set to begin monetary policy easings in the second half of 2024.
“Bond markets are in a really good position to deliver strong returns to investors in absolute and relative terms in coming months,” she described.
Vanguard recently highlighted the current opportunity for historically higher yields while potentially benefiting from short-term price tailwinds for those entering the bond market now.
Wood continued: “We are seeing a broad-based slowdown in the global economy and the conditions for fixed income to deliver very strong returns are set in place; we’ve got moderating inflation, economic growth is slowing, and central banks globally are cutting interest rates.
“That is exactly the environment where fixed income delivers not only very strong absolute returns, but also very good relative returns compared to other asset classes like cash and equities.”
Despite the positive news for international bond markets, the head of fixed income warned that Australian government bonds could underperform other bond markets due to Australia’s higher inflation in comparison to its developed counterparts.
The Reserve Bank of Australia (RBA) has also taken a higher-for-longer approach in combating stickier inflation, with the cash rate remaining unchanged at 4.35 per cent for the sixth consecutive time.
“The Australian economy looks a little stagflationary, with core services inflation is still running at around 5 per cent, but we have seen economic growth starting to slow. That puts the RBA in a difficult position because that is an environment where it can’t cut interest rates with inflation still too high.
“We think the Australian economy is about six months behind the US and the rest of the world, as we are still waiting for inflation to moderate,” Wood explained.
Schroders does not expect the central bank to begin easing monetary policy this year unless a collapse in economic growth were to occur. Instead, it is more likely to see the RBA start cutting rates in 2025, she said, opposing views that it may cut rates at the next meeting.
“Given this lag, that is an environment where we expect the Australian bond market to underperform bond markets in the US, Europe, the UK and Canada. Our valuation and cyclical framework had us preferring credit over government bonds where we have seen very strong performance from Australian credit and mortgages both in the US and Australia.”
