Roy Keenan from Yarra Capital Management shares insights with James Dunn from The Inside Network on the role of active management. The Inside Adviser
After the Hayne Royal Commission many advisers decided to steer away from large dealer groups in favour of becoming self-licensed. In the last six months, however, that trend has taken an abrupt turn.
‘Blatant mispricing’ in Aussie bond yields
2022 has been a difficult time for most investors, but for none more so than bond fund managers. The New Year’s resolution of global central banks to (finally) aggressively combat accelerating inflation has seen an incredible surge in bond yields in Australia and around the world.
A case in point is the Australian 10 Year government bond yield, which currently sits above 3 per cent. That’s close to double the level at which it commenced 2022, and well above the sub-1 per cent rates that dominated markets throughout 2020. What is surprising most investors, though, is the fact that it currently stands well ahead of the US 10 Year rate, at 2.8 per cent.
Multi-billion fixed income manager Jamieson Coote Bonds (JCB) recently flagged this in the quarterly update for its Dynamic Bond Fund, suggesting it is a “blatant mispricing” of the future and outlook for the two economies. “The expected RBA implied policy rate in two years….is more than 50 basis points higher than that of the US,” the update explained, questioning whether the RBA can (or even needs to) raise rates at a faster rate than the Fed in the US.
Given that Australia’s inflation rate remains significantly lower than that of the US, and employment and participation are in a much stronger position, the “mispricing” commentary appears highly relevant. The result, in JCB’s view, is that the “market pricing is now sufficiently hawkish” and that a period of stabilisation, or one where duration may well be rewarded once again, “is likely in the coming months”.
Duration risk has been incredibly difficult for fixed income managers in recent months, with increasing yields not yet sufficient to offset the resulting reduction in bond values, as yields surge. This is evidenced by the stark difference in returns between the group’s Dynamic Bond strategy, which fell just 0.6 per cent during the March quarter and 0.2 per cent for the year, and the Global Bond Fund, which is down 4.5 and 4.3 per cent respectively. The former fund carries duration of just 0.5 years and the latter 8.2.
An acceleration of the sell-off through the month pushed yields to levels not witnessed since the previous US Fed hiking cycle of 2018. The cocktail of hawkish factors included higher inflation on a realised and forward-looking basis, a notable uplift in hawkish dialogue from global central banks and continued geopolitical risks from the Russian/Ukraine conflict fuelling inflationary expectations.
One doesn’t have to always be negative in this environment, but with the growing risk of recession, JCB believes that “yields have entered zones that remain very appealing from a long-term valuation,” hence pension and institutional investors may well be looking to reallocate to the sector as they rebalance portfolios.
After what JCB described as “truly historical” moves in the market, it is difficult to see this slowing down anytime soon.
