T. Rowe Price has moved from underweight to neutral on Australian bonds at the expense of its global allocation.
In its global asset allocation report, the firm said it had moved neutral on Australian bonds but reduced its global bond allocation from overweight to neutral.
This was in line with the expectation that the Reserve Bank of Australia (RBA) would be one of the first central banks to begin raising interest rates.
“There is no stopping in sight for the domestic recovery (stimulus, confidence, pent up demand). Long term rates should rise in accordance with the shift in tone from the RBA,” it said.
“We continue to have a bias towards shorter duration, higher yielding and inflation-sensitive sectors through overweights to high yield bonds, floating rate loans and, to a lesser extent, short-term Treasury inflation-protected securities, which we moderated over the month.”
However, it acknowledged there was a risk the RBA could abruptly change its policy guidance as it upgraded economic forecasts so investors needed to beware of a U-turn in financial conditions.
Meanwhile, for global bonds, the firm felt rates would be contained at the short end and that higher inflation could lead to a bias for keeping longer-dated yields higher.
“Longer-term interest rates likely challenged to move higher as growth moderates, inflation softens from recent peaks, and Federal Reserve moves closer to tapering asset purchases, while short-term rates could begin to price in tighter policy leading to a flattening yield curve,” it said.
“While still supportive, global monetary policy should continue to see a gradual trend toward tightening among central banks, notably within emerging markets facing rising inflation.”
On the equities side, T. Rowe Price retained its overweight position to Australian equities as it felt rising yields and rising commodity prices were two positives for an earnings recovery.
“Economic data continues to roar, boosted by strong commodity prices and construction related activities. Business capex is expected to rebound to support future earnings growth and the Australian Dollar should likely catch a bid from higher commodity prices, rising long term yields and a policy shift from the RBA.”
It was also overweight to Japan and emerging markets and underweight to North America, Europe and global equities.
