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The Point
Quick, actionable insights for investors
Income and Fixed Interest
Tim Hext: An upgrade to the financial system’s plumbing
Private debt vs. public bonds: why it’s time to re-examine the traditional role of fixed income
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Private debt vs. public bonds: why it’s time to re-examine the traditional role of fixed income
Private credit has its place in portfolios.
So do bonds.
As rates normalise, investors would do well to remember those roles are different, writes Pendal head of income strategies Amy Xie Patrick.
AMY XIE PATRICK: How to manage fixed income portfolios in this environment
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AMY XIE PATRICK: How to manage fixed income portfolios in this environment
This week Pendal’s head of income Amy Xie Patrick sat down with head of client solutions Dale Pereira to answer some common investor questions.
A common query is: when rates are higher, why not leave my money in a term deposit?
“For some investors, term-deposit returns on cash are enough,” says Amy. “They’re more than happy to take those returns after years of really slim pickings in this area.
“But the biggest frustration for many investors who chose term deposits over fixed income last year was missing out on the upside. Both bonds and equities outperformed term deposits in 2023.
“This year, locking in 5% term deposits might sound nice at first.
“But you would also be locking up your capital for a year.
“It makes it harder to move your money around when things change, which means you can’t deploy it quickly or easily to buy the dip if we get a decent correction in markets.”
Tim Hext: What we learned from the latest GDP data
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Tim Hext: What we learned from the latest GDP data
The December-quarter GDP numbers stopped just short of the “no-growth” scenario we were slowly sliding towards last year at 0.2%.
What were the takeaways for markets?
“First of all, rate hikes have worked,” says Pendal’s head of bonds Tim Hext.
“While the fixed-rate cliff has been more of a speed bump, the RBA will be pleased that higher rates are reducing demand.
“Lower immigration in the year ahead will also help. The supply side of the economy has largely normalised.
“This will give the RBA further comfort that the path back below 3% inflation is achievable.
“This opens the door to rate cuts later in the year. We think three cuts – September, November and December.
“By then the US Fed should be well into rate cuts. Inflation – while sticky around 3 per cent – would be considered under control.
“GDP would be allowed to push back up towards 2% or above without threatening the inflation outlook.
“This would be a good outcome for all and meet the objectives of the RBA.”
Amy Xie Patrick: Outlook from the bond enthusiast
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Amy Xie Patrick: Outlook from the bond enthusiast
What are the main factors impacting income strategies right now?
Pendal’s head of income strategies Amy Xie Patrick has just published a deep dive on how her view has evolved in recent months.
Among Amy’s main observations:
- Consumer resilience has been surprising and may be explained by a rise in real incomes as inflation cools
- This limits the ability of bonds to keep rallying since central banks may be fearful of reigniting a new wave of inflation
- As markets entertain the idea of “no landing”, there could be heightened market volatility and bouts of “everything sell-offs”
- If growth remains resilient these bouts should be short-lived and present opportunities for active portfolios.
- A hard landing isn’t off the table, but it’s too soon to position for it just yet
Tim Hext: January inflation – a low point, for now
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Tim Hext: January inflation – a low point, for now
On-demand webinar: How to conquer the interest rate peak
A cut in the official cash rate by the Reserve Bank is likely around September this year, according to Commonwealth Bank’s Stephen Halmarick and Pendal’s Tim Hext.
Halmarick and Hext sat down together in a new on-demand webinar to discuss the implications of the February RBA rates decision.
Inflation is set to continue falling as the economy slows, thanks to a weak household sector, while the unemployment rate will rise, Stephen believes.
With a soft landing the most likely outcome, the current bond rally should be sustained, Pendal’s Tim Hext argues.
“Bonds still represent some value though they’re not as cheap as a year ago,” Tim says.
“You should have more duration than normal in bonds. You should be comfortable about owning credit, and it’s not a bad environment for equities.”
Click through to watch – CPD points apply.
Goldilocks beware: US inflation data puts markets on notice
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Goldilocks beware: US inflation data puts markets on notice
This week US inflation surprised to the upside.
It was only a small miss, notes Pendal’s head of government bond strategies, Tim Hext.
“But it came against the narrative of falling inflation. Fed cuts are being pushed out and bond yields are drifting higher.”
For now, the markets will grant inflation a bit of leeway, says Tim. “Long-term inflation expectations only moved a little higher.
“But if this becomes a trend in the months ahead risk markets will start to take notice, since rates will stay higher for longer and the chance of a recession will increase.
“Goldilocks beware.”
Pendal’s view is that the overall trend to lower inflation is still intact, says Tim.
“But after last year’s sugar hit from lower oil prices and improved supply chains we’re entering a period of more balanced risk.
“I expect the fallout from this week’s numbers to persist very near term, as momentum funds lean against a vulnerable market.
“This will open up opportunities to once again build exposure into long-duration positions.”
Tim Hext: Inflation is on the right path, but we’re not there yet
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Tim Hext: Inflation is on the right path, but we’re not there yet
Fixed income: Pendal’s 2024 outlook for bonds, credit and cash
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Fixed income: Pendal’s 2024 outlook for bonds, credit and cash
What lessons can fixed income investors take from 2023 into 2024?
Pendal’s head of income strategies Amy Xie Patrick sat down with fellow PMs George Bishay, Steve Campbell and Tim Hext to review the year.
We encourage you to read the full article, which covers the outlook for bonds, credit and cash. Some quotes:
Tim: “My framework for 2024 is for falling inflation and yields. Though I’ll be flexible since it likely won’t be a straight line down.”
George: “You can’t ignore the tail risks out there. I’ve kept to top-quality issuers, stayed in senior positions in capital structures and always had an eye on liquidity when adding risk this year.”
Steve: “I expect the cash rate to remain unchanged over 2024, though with bouts of volatility.”
Amy has the odds of a US recession at two-thirds in 2H 2024. “Consider rotating back into fixed income and cash – and look for good active management,” she says.
Pendal’s head of income reveals a high-conviction call and a non-consensus view for 2024
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Pendal’s head of income reveals a high-conviction call and a non-consensus view for 2024
This week Pendal’s head of income strategies Amy Xie Patrick was asked in a Bloomberg webinar about her highest conviction call for 2024.
“While markets are pricing in a soft landing, I argued there would likely be a US recession in 2024,” says Amy.
“A lag in the impact of policy tightening has been evident in the slowdown of inflation and wages in recent months.
“This can be seen particularly in shifting trends in the labour market. The most obvious signal is a falling ‘quits rate’, signalling workers are becoming less confident about alternative job prospects.
“In my view, lagged effects will continue to appear in the data next year – and as we all know from history, recessions happen slowly, then suddenly.
“Likely in the second half of next year markets will realise disinflation is no longer immaculate – and is being caused by recessionary forces.”
Income and fixed interest wrap: latest outlook for inflation, rates and bonds
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Income and fixed interest wrap: latest outlook for inflation, rates and bonds
The Reserve Bank has revised its end-of-year inflation forecast to 4.5% – where it was in May. Are they right?
Pendal’s income and fixed interest team expects Q4 inflation between 0.7% and 0.8%, meaning the annual figure would be closer to 4.2%.
“If we’re right, then the November rate hike wasn’t needed,” says head of bond strategies Tim Hext.
“More importantly, this makes the chance of a February hike very low.
“Beyond February, inflation should remain sticky around 0.8% to 0.9% a quarter, meaning rate cuts are off the table for most of 2024.”
Pendal roughly agrees with the RBA’s expectation of a 3.6% number by mid-2024.
“By the middle of next year, US rate cuts may well be on the table, helping bonds find more support.”
In Australia, all eyes will be on Santa’s stocking to see the impact of the pre-Christmas hike.
Bond yields remain attractive on a medium-term basis, says Tim.
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