The Point

Tim Hext: RBA minutes – inside a meeting of two-handed economists

Despite a narrative around re-emerging inflation, Australian investors are remarkably relaxed about the outlook for prices, observes Pendal’s head of government bond strategies, Tim Hext.

April’s inflation numbers – released yesterday – show a 3.6% increase in the annual Consumer Price Index. That’s slightly higher than March (3.5%) and more than the 3.4% markets were hoping for.

A rise in goods prices – mainly furniture, footwear and clothing – will not go unnoticed by the Reserve Bank and will require further investigation, says Tim.

But overall, the market is backing the RBA to do its job, he says. Implied 10-year inflation levels remain reasonably well anchored at 2.77%.

“Three-year yields in Australia moved back above 4 per cent after the data. We view this as a buying opportunity, since our medium-term view on inflation is positive.

“US inflation numbers come out on Friday and should show lower rental data feeding through to lower outcomes.

“Unless our concerns ramp up, we will be happy to be long duration into the winter months.”

Prevailing view or misconception? Pendal’s Amy Xie Patrick busts a few modern investing myths

The past few years have played havoc with conventional market assumptions.

Inverted yield curves don’t mean recessions are imminent. Expensive valuations can get more expensive. An aggressive hiking cycle need not bring about recession. Bonds don’t have to go up when equities go down.

These things can cause head-scratching among modern-day investors.

“But viewed through a longer-term lens – think multiple cycles and regimes – these events become clearer,” says Pendal’s head of income strategies Amy Xie Patrick.

In this article, Amy explains what’s really going on with these “broken relationships”.

For example, an inverted yield curve – when short-term interest rates are higher than long-term ones – is often viewed as a sign of a looming recession.

But history shows the lag between the curve inversion and recession is highly variable – three months to two years.

“It simply indicates the market expects interest rate cuts at some point down the line, and that current policy settings are restrictive and will be normalised – for whatever reason – in the future.”

Amy Xie Patrick: No more sugar hits for China

Signal or Noise – Amy Xie Patrick on Livewire

Pendal’s head of income strategies AMY XIE PATRICK joined Livewire to discuss the “Goldilocks era” of income and answer some of the market’s quick-fire questions.

Income and fixed interest: Pendal’s quarterly deep dive into the themes driving Australian markets

Pendal’s income and fixed interest team has just published its quarterly deep dive into the themes driving Australian markets.

In the latest edition, head of government bond strategies Tim Hext explains how the RBA’s liquidity system affects investments – and why Australians need to honestly appraise the liquidity of their funds.

Head of income strategies Amy Xie Patrick explores which kind of income funds are best suited to the likely economic landing scenarios.

(Hint: not one-dimensional funds).

Senior credit analyst Terry Yuan writes about a recent transformation in the credit bond issuance market which has led to a number of deals becoming heavily over-subscribed.

An unprecedented shift from a buyer’s market to a seller’s market has led to significant changes in pricing dynamics, Terry says.

Lastly, senior ESG and impact analyst Murray Ackman has a quick guide to the key questions investors should ask about sustainable investing opportunities.

Murray Ackman: Why we bought Australia’s first Commonwealth green bond

Australia has joined other sovereign nations in issuing an inaugural Commonwealth green bond.

There are several reasons why Pendal invested in the bond. Here are a few, according to senior ESG and impact analyst Murray Ackman.

Firstly, we want the first Commonwealth green bond to support new projects. “This is known as additionality – that is, funding something that would not have been funded but for this green bond,” Murray explains.

Secondly, Pendal examined whether the bond funded revolutionary projects. “We would like to see more catalytic change, but for the very first Commonwealth Green Bond, we are pleased with the scope of projects.”

Pendal was also satisfied the bond included clear reporting on impact as well as performance.

“The government made the commitment to have independent verification of allocation and impact reporting.

“We are hopeful that this bond will demonstrate what the minimum requirements are for clear and transparent reporting for green bonds in Australia.”