Just as with equities, the uncertain outlook for inflation is a game changer for bonds.
Fixed income returns over the fiscal 2022 year were the worst on record. When sharemarkets experience returns like that, investors are conditioned to look for bargains, butdesigned to reduce volatility and cushion the effects of falling sharemarkets. Fixed income investments normally play that role which typically means allocating to government or corporate bonds, which are two very distinct markets that are driven by different factors.
Because bonds issued by governments of developed nations are almost certain to be repaid, the price they trade at is not normally influenced so much by their credit rating as the outlook for inflation in their home country. If the market expects inflation to rise, investors will demand a higher yield to compensate, which requires a lower price and vice versa.
Andrew Papageorgiou, managing partner at Realm Investment House, explains: “Just like bargain hunting in the share market, there are short and long-term considerations for fixed income investing. However, unlike the sharemarket, fixed income markets have nuances that are only revealed through information that’s tough for non-professional investors to get their hands on.
For the longer-term outlook, Damien Hennessy of Zenith Investment Partners, says the market signals around whether inflation has peaked or economies will recess, are so mixed that it’s difficult to view fixed income as a set and forget strategy right now. He points out that bond yields in June spiked to levels where he recommended reducing underweight positions and have since fallen again, making them less attractive.
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