INGIM backs credit and Aussie bonds

Credit will be the best performing of the fixed income sub-sectors and Australian bonds will continue to outperform their global counterparts, according to ING Investment Management.

The Australian economy continues to expand at a robust pace since the global financial crisis; and while bond yields have been in a bear market phase since early 2009, yields are now close to long term average levels, according to INGIM’s head of fixed income Greg Michel.

Yields of 5-6 per cent are greater than those available from global alternatives, and INGIM expected flat to negative returns from global bonds in 2011.

Australian government bonds will remain at or near current levels for the rest of the calendar year with demand dominated by offshore investors, he said.

And while underlying interest rates will rise, continued credit spread contraction should see credit perform in a relative sense, INGIM stated.

INGIM’s head of credit research, Scott Rundell, said credit has rallied strongly over the past two years with improving fundamentals and fiscal stimulus, although there is a sense the rally has overshot fair value and spreads may tighten.

Offshore markets are more competitive than the Australian bond market with some players demanding unpalatable spread levels, and new issuance in Australia is likely to be low, he said.

European sovereign debt challenges will continue to cause headwinds for fixed income, with Irish senior bank debt potentially creating contagion risk to other EU banks, causing the cost of bank funding to spike, according to INGIM.

Chinese growth and demand for raw materials and the impact of recent events in the Middle East and North Africa on oil prices are also factors to watch, INGIM stated.

“The management of many global companies may look to appease shareholders who have experienced negligible growth with capital initiatives aimed at increasing their returns. This could also be a negative credit event,” Rundell said.