Aussie bonds have chance to outperform

The Australian bond market is one of the least risky in the world, and has the opportunity to outperform if something unexpected occurs, according to UBS.

Speaking at a Russell Investments forum, UBS head of fixed income for Asia Pacific Anne Anderson said this was because of the strength of the Australian economy and the nation’s corporations.

A strong governance framework also contributes to a favourable bond outlook, Anderson said, although the global backdrop is somewhat more challenging at this time.

If China were to have a sharp downturn that would lead to weaker growth, but one of the reasons you have bonds in your portfolio is that interest rates have ample scope to be cut here, she said.

“I don’t see that as a major risk but it is one we need to consider. Should it happen, having fixed income in your portfolio is something that would buttress returns,” she said.

In general the market is well valued, the yield curve is flat because policy is tight, we will see prospective to moderate increases in the cash rate, and the economy remains in good shape meaning it’s unlikely we will see significant values, she said.

“The way we’re approaching the market at this time from an investment management perspective is be more tactical in terms of seeing bonds in a fairly defined range. There’s value to be had from being active within the credit sector.”

“Aussie bonds do have a tremendous opportunity to outperform in the event of something unexpected occurring,” she added.