'Bond friendly environment' as economy recovers
Bonds are still an attractive option as the economy may take years to rebound to its pre-COVID-19 state, despite potential short-term boosts.
According to FE Analytics, within the Australian Core Strategies universe, the Australian fixed interest sector had an average return of 4.48% over the one year to 30 April, 2020.
The best performer was the Pendal Fixed Interest fund which returned 8.05%, followed by Russell Australian Government Bond ETF (8%), Mercer Australian Sovereign Bond (7.82%), Jamieson Coote Bonds (7.75%) and Pendal Government Bond (7.76%).
In its April commentary, Pendal said with short rates likely in place for the first half of this decade, investors would continue to chase further along the curve and risk spectrum.
“Whilst we cannot predict medical outcomes, we view the damage done as partly structural, not just all cyclical,” it said.
“The recovery will be quick initially, given the scale of the falls in employment and GDP [gross domestic product]; however medium-term the economy will take years to return to pre-crisis levels.
“Inflation may rise later this year but will also remain well below RBA [Reserve Bank of Australia] targets for some time.
“All this points to a bond friendly environment and we continue to favour being long duration at these yields.”
Its analysis suggested there was a few technical dynamics that continued to support credit markets in Australia.
“These include the excess liquidity in the banking system, the lack of primary issuance thereby reducing supply supporting secondary pricing, and finally wider credit spreads against a 0.25% cash rate is attracting buyers,” it said.
However, there was concerns over uncertainty with the flow-on effect to the global economy and company earning due to COVID-19.
“We will continue to closely scrutinise relevant developments and assess the potential ramifications as they occur,” it said.
“Over the longer-term, policy measures should be supportive for risk assets; this leaves us with a cautiously constructive stance.”
Best performing Australian fixed interest funds over the one year to 30 April 2020
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