The RBA’s hawkish tone could mean a hard landing with a fast turnaround on rates later this year. That means fixed interest investors should be eyeing longer-dated bonds.

In Pendal’s latest webinar, Commbank chief economist STEPHEN HALMARICK reviews the latest economic data while Pendal head of bond strategies TIM HEXT outlines the impact on fixed interest investors. Here’s a summary.

WITH higher rates on their minds, Aussies have begun reining in spending in the past two weeks, says Commbank chief economist Stephen Halmarick in a new Pendal webinar.

Halmarick, who has a unique, real-time view of the spending habits of CBA’s 16 million customers, says consumer spending continued during the summer holidays, but is now slowing down.

The economist was speaking alongside Pendal’s head of bonds Tim Hext in Wednesday’s Why bonds, why now? webinar. (You can watch a replay here).

“People were saying: ‘I know interest rates are going up and I know inflation is high, but what the heck, I need to have a holiday’,” says Halmarick.

“That was pretty clear in the data. Things like eating out and recreation and travel were very strong.

“In the first week of February, things have definitely softened again.

“I’ve seen a turn-down in spending in the last two weeks on the CBA credit and debit cards.” (Halmarick stresses the data analysis is anonymous).

That will be good news for the RBA, but it’s unlikely to change its hawkish approach to inflation in coming months.

Why bonds, why now

Ausbiz’s Nadine Blayney interviews CBA chief economist Stephen Halmarick and Pendal head of bonds Tim Hext

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That’s partly because of strong wage growth – another area Halmarick has excellent real-time insights via the salaries deposited into savings accounts.

“The annual rate of wages growth is heading towards 3.5 per cent,” he says. That’s against official ABS data showing 3.1 per cent growth.

“If it gets too much north of 3.5 per cent towards 4 per cent, the RBA will be quite worried about the inflationary impact of that and then maybe you get more rate hikes.

“So, we’re definitely watching wages go up very closely.”

Odds increase on hard landing

While a soft landing is still likely, the chance of a hard landing in Australia is rising as the RBA takes a more aggressive approach to inflation, Halmarick says.

The strong tone taken by the RBA this week has narrowed the path for the bank to get control of inflation, with the official cash rate now expected to hit 3.85 per cent by April, up from 3.35 per cent today.

“We would describe that as very restrictive monetary policy,” he says.

“The RBA has been talking about a narrow path forward to get inflation back towards target while also having the economy grow.

“I think that path is getting narrower and narrower. The risks of a hard landing are growing.”

A short cycle?

Halmarick reckons the cycle will be short and rates could still fall this year.

He is forecasting “inflation declining at a much faster rate than the Reserve Bank’s forecasts”.

That means rates are likely to peak this year, he says.

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“We’re currently forecasting GDP growth this calendar year of 1.6 per cent but the risks are now on the downside for that.

“We think the RBA will need to start cutting interest rates before the end of this year. So, we’ve got a fairly quick turnaround in that cycle.”

What it means for investors

The upshot for fixed interest investors?

Pendal’s Tim Hext says it’s time to consider longer-dated bonds as insurance while locking in a decent income.

Bonds play two important roles in a portfolio: acting as an insurance policy against a downturn and providing income.

“It’s certainly not a time to be underweight bonds,” says Hext. “A 3.7 per cent triple-A government guaranteed return for the next 10 years is pretty decent income.”

But investors need to consider the duration of bonds as the economic picture changes, he says.

Take care with bond duration

Duration is a measure of the sensitivity of a bond’s price to changes in interest rates.

The longer the duration of a bond (for example ten years compared to two years), the more sensitive the bond’s price is to changes in market interest rates.

“Duration is the period you are locking in current rates for,” says Hext.

“If you buy a 10-year bond, you’re locking in for 10 years. If you buy a two-year bond, it’s only for two years.

“Bond prices are far more sensitive to interest rate changes the further out you go.

“If you think rates are going up, you should keep your investments as short as possible so you can take advantage of the higher rates down the track.

“But if you think rates are going to fall, you want to lock them in for as long as possible.

“Our advice to clients is if you’ve got quite short duration, you should be looking to lengthen that.

“With 10-year bonds around 4 per cent, we don’t think cash rates are going to be able to get that high. If they do, they’ll only be there very briefly.

“Therefore, you’re going to get a better income locking in for a longer term.”

Watch a short webinar with Stephen Halmarick and Tim Hext

About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here

About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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