Tim Hext: Why bonds still look better than term deposits

Have investors missed the boat on bonds after they touched 5 per cent in October? No, says Pendal’s head of bond strategies Tim Hext. In this latest fast podcast he explains why.

You can also listen to this podcast on Apple or Spotify

An excerpt from this interview with Pendal’s head of government bond strategies Tim Hext:

For the first time in a number of years, it’s a pretty favourable environment for bonds.

Although they’ve rallied this month, 10-year bonds are roughly around 4.5% in Australia now.

They did briefly touch 5% at the end of October. People may look at that and say, “Oh, I’ve kind of missed it”.

But 4.5% is still very attractive if you believe inflation is going below 3%.

I think we’re still in the territory where if you lock your investments in from a fixed-rate point of view —in other words you buy bonds — you’re likely to do pretty well out of it.

4.5% should turn out to be a pretty good return, because term deposits are creeping up around 5% now.

When I look across the spectrum of what you can buy in bonds, government bonds are around 4.5%, state government bonds 5.25% and bank debt around 6%.

On term deposits, my question to investors would be: Okay, let’s assume term deposits are at 5% and you’re locking yourself into those with no liquidity.

Where do you think on average they’re going to be over the next five or 10 years?”

I think most people would assume they’re going to be a little bit lower, not higher; and that cash rates will come down rather than go up a lot more.

And yet, right now you can lock in, for five or 10 years, rates above 5% in bonds.

The other advantage of bonds is that they’re liquid.

You can sell them anytime. You’re not locked up like you are in a term deposit.

That’s particularly important, that if you saw a sudden sharp sell-off in equities and you’re wanting to buy them — but your money’s locked up in term deposits.

What does worry me is that central banks are driving in a rear-view vision mirror — they’re relying on inflation, and inflation is a very lagging indicator.

So they’re probably going to be a bit too slow to cut rates, because they’ll still be looking at inflation not coming down fast enough in Australia particularly.

That does open the door a little bit for some economic weakness. It’s not a core view, but there’s a higher danger of that.

Apart from that, the soft-landing scenario does look favourable for credit as well, and even for equities — which I think the markets started to factor in a little bit in the last month.

Listen to the full podcast above

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Pendal’s Income and Fixed Interest funds

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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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