Fixed income yields may be dangerous to ignore

Investing

The important question for investors now is how much more tightening is required by central banks to achieve control over inflation?
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Australian fixed income securities currently have the highest yields seen for many years, making them attractive, relative to other asset classes, for investors seeking to guard against the risk that central banks overplay their hands and tip economies into recession as they tame global inflation.

Anthony Kirkham, portfolio manager for the Western Asset Australian Bond Fund, says the fund’s cash flow yield is currently around 4.7% compared with 1.1% in August last year. The $1.4 billion Western Asset Australian Bond Fund is an actively managed fixed income portfolio that launched in 1998.

Kirkham says, “It has been painful to get to this point, but we now have confidence that given the outright level of yields available in the market, fixed income’s ability to provide defensive attributes to a broad range of risks is fundamentally re-established.”

The important question for investors now is how much more tightening is required by central banks to achieve control over inflation.

Kirkham says that on the corporate holdings front, NBN was a standout as its spread recovered from an oversold position, as did a number of REITs, including Stockland.

“We continue to believe that the investment grade corporate market in Australia is a standout due to the type and quality of issuers in our market, all of which are generally able to pass on any inflationary pressure due to their monopoly or duopoly positions in their sectors.

“Regulated assets are also prevalent in our market. These businesses can pass on higher costs through pricing resets. Current credit spreads on these assets definitely do not represent underlying fundamentals.”


This article represents the views only of the interviewee and should not be regarded as the provision of advice of any nature from Forbes Australia.  The article is intended to provide general information only and does not take into account your individual objectives, financial situation or needs. Past performance is not necessarily indicative of future performance. You should seek independent financial and tax advice before making any decision based on this information, the views or information expressed in this article.