Hedged global bonds still offer an attractive return for Australian investors, according to PIMCO’s head of global product management, David Fisher.
Because interest rates in other developed markets are likely to hover around the zero to 1 per cent mark for the foreseeable future, Australia’s cash rate of around 4.5 per cent meant on average around 400 extra basis points of carry once you converted back into the local currency, Fisher said.
Global bonds were unlikely to get anywhere near the returns in excess of 10 per cent seen in the 2009-10 financial year but there were still opportunities, as long as investors knew which markets to avoid, he said.
Countries that had weak market conditions such as high levels of debt or low policy flexibility were the ones that had fared the worst, such as those in the euro periphery, like Greece, Portugal, Spain and Italy, he said.
Fisher did not anticipate a near term default for countries such as Greece due to support from the European Central Bank, but warned that while near term liquidity issues had been addressed, long-term solvency issues had not.
Countries with solid fundamentals like Canada and Australia had addressed debt issues in previous decades and were well exposed to emerging market growth through commodities, making them an attractive proposition on the global market, he said.
Emerging markets such as China, South Korea, Brazil and Mexico came into the global financial crisis with low debt and high policy flexibility, which put them in a good position.
The US, while having some longer-term structural issues, still has near term value. It remains an important flight to quality market and the US dollar remains the world’s most important reserve currency, which had resulted in a recent surge in the US dollar, he said.
PIMCO had shifted a fair amount of assets out of Europe into the US in recent months for these reasons, reflecting the idea that the US treasury is the main risk-free asset on a global basis, he said.
With interest rates likely to remain low in developed markets, bonds could remain attractive despite low yields because a recession is already priced in, he said.
