Fixed-rate bonds pose more risks to investors

The negative performance of the headline bond index in Australia highlights the risks that traditional fixed-rate bond investments currently pose to investors, according to BetaShares.

The fixed-income investors who are seeking the defensive characteristics of bonds should look at floating rate bonds as a more attractive alternative to fixed rate bonds in the current market environment, the company said.

According to its study, “Bonds behaving badly? An analysis of recent fixed vs. floating bond returns”, higher bonds were leaving Australian fixed-rate bond index investors exposed to potential losses.

“Floating rate bonds posted good returns over the past year, and appear well placed to continue to perform strongly,” BetaShares’ managing director, Alex Vynokur said.

He explained that the challenge with the headline bond index in Australia is dominated by fixed-rate government and corporate bonds, meaning its capital return was highly sensitive to the changes in the general level of interest rates.

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At the same time, the price of floating rate bonds was much less sensitive to changes in the general level of market interest rates.

“Accessing floating rates bonds has traditionally been difficult for the majority of investors, because of the high minimums required in institutional bond markets, and administrative burdens involved,” Vynokyur said.

The recent rise in bond yields, the capital return from the Bloomberg AusBond Composite Index (BACI) declined by around three per cent in the year to end-August 2017.