Current poor returns from the bond market could signal Australia once again plunging into a recession according to research house Standard & Poor’s.
“Long and short-term bond yields are out of kilter, presenting all sorts of problems in weighting asset portfolios, and possibly presaging a recession, or at the very least some stock market volatility around the corner,” said Simon Ibbetson, head of Standard & Poor’s investment consulting.
According to Ibbetson, Australian investors are currently experiencing an inverted bond yield curve, which means that longer dated bonds, some up to 10 years old, are yielding less than cash.
And in the past, such a scenario has been a precursor to a slowing economy.
Ibbetson said bond yields were currently so low because fixed interest investments were coming under increasing demand.
“There’s been a lot of demand for long-term instruments, people want that security of income. And that’s driven down spreads and driven down rates,” he said.
“What the bond market is telling us is it doesn’t think growth will be as strong and inflation is not going to be an issue going forward.
“Growth probably will slow down, but inflation is not a problem in the mid to long-term.”
In light of the inverted bond yield curve, which Standard & Poor’s said was potentially the most important issue facing investors right now, Ibbetson suggested investors increase their weighting to shorter duration investments such as cash.
“A more long-term outlook suggests an absolute return orientation.”
He also recommended investors ease off on equities, as the market is, in his opinion, fully priced.
Apart from cash, Standard and Poor’s is recommending investors look to global listed property, which Ibbetson said offered diversification across many different markets.
