Fixed income specialist Western Asset is optimistic on Australian fixed income, favouring semi-government bonds despite the reduction in the cash rate last year.
In its market outlook, the firm, which is an affiliate of Franklin Templeton, said the Reserve Bank of Australia (RBA) would be able to maintain “very easy” conditions for the next three years.
Rates were cut from 0.25% to 0.1% last year, a record low for Australia but it brought the central bank in line with other developed markets.
“The RBA recently reduced the cash rate to 10 basis points (bps) and also embarked on its first real quantitative easing (QE) program with the purchasing of government and semi-government bonds alongside the current yield curve control program,” it said.
“The RBA’s focus is now on realised forecasted inflation and unemployment levels as well as maintaining very easy monetary conditions for at least three years.
“We favour high-grade sectors such as semi-governments, supranational debt and index-linked bonds for insurance purposes.”
Meanwhile, the firm was negative on Japanese fixed income due to an expected steeper yield curve.
“In Japan, we expect a steeper yield curve, especially in the super-long end as the front end and intermediate part of the curve are likely to stay low under the yield curve control framework by the Bank of Japan (BoJ),” it said.
In Europe, the firm was wary of higher-risk sovereigns but...