The current investment boom and low unemployment means the outlook for the Australian bond market looks strong, says Mr Roger Bridges, head of fixed income at Tyndall Investments.
“I expect 10-year bond yields to continue trading at between five and six percent, with the possibility of a short-term rise before returning to the current levels, and Australia is in a healthy shape despite risks in much of the world.”
Mr Bridges said that the Tyndall view is that the cash rate will rise to 5.5 percent by the end of this calendar year.
“This reflects the investment boom on the back of the terms of trade, and ongoing low unemployment due to our resilient banking system and growth in emerging markets such as China.
“While attention has focused on growth in the resources sector, and particularly mining, data shows that growth is happening over the wider economy.
“For instance, the latest Australian Bureau of Statistics study shows that companies are planning to make significant capital investment over the next few years, expecting this to grow by 23 percent this year, and 32 percent next year,” Mr Bridges said.
He warned that some of the positives could start to create headaches if not managed well, such as the strong employment growth.
“Australia’s unemployment rate is the envy of the world, but it has its own problems.
“The high employment level means there is a lack of spare capacity in the job market and, in particular, there is little skilled labour available, which will impact on growth.
“The Reserve Bank of Australia (RBA) needs to slow some sectors down if it is to manage inflation risk, so interest rates will inevitably rise, but the timing is still an unknown which means that some uncertainty is affecting companies.
“Other risks include the price of oil, in light of events in the Middle East and North Africa. Potentially, high oil prices could derail growth around the world, which has happened before. With US consumers only just starting to spend again, this could become a problem.
“Food prices, and the link to political unrest, are also a possible risk. We are already seeing demonstrations in some countries, particularly the Middle East, and China has increased its internal security budget which suggests the government is worried about possible unrest.
“US policy decisions are another concern, including whether the government can wind down the quantitative easing package without reigniting inflation.
“In light of these considerations, at Tyndall we are positioning our portfolio with a slightly short term duration, and we are currently overweight in Commonwealth Government securities, which we usually avoid because of the liquidity premium.
“We are also selling down semi-government securities which we see as having higher risk, and monitoring credit which is providing good value at the moment.
“Fixed interest investments continue to provide a reliable option for investors who should be expecting the unexpected. There is enough uncertainty around to cause growth to come off and inflation to be delayed, and if there’s anything that we’ve learned over the last three years – and even the last three months – it is that anything is possible,” Mr Bridges said
Tyndall Investments Australia offers Australian equities and Australian and global fixed interest funds to retail and institutional investors in Australia. It has over A$22 billion in funds under management (as at 31 March 2011). Tyndall Investments is a wholly owned subsidiary of Nikko Asset Management Co., Ltd., one of the largest asset management companies in Japan with approximately A$175 billion in funds under management (as at 31 March 2011).
For more information please contact:
Roger Bridges – 02 8275 3269