The Point

How to think about high-yield bonds right now

The jump in bond yields this year has been stark, particularly in the high-yield end of the market.

US double-B rated bonds, for example, yielded 3.2% at the start of the year and are now around 6%.

Is that enough to look at high-yield investments, given the risk-reward trade-off?

“Fixed income is, in our view, certainly much more investable today than it’s been for a while,” says Bill Bellamy, who heads up income strategies at Pendal’s US-based investment manager TSW.

“But we’re probably not totally done with this corrective phase and there is still room to go with yields. As they rise, there are going to be some very good opportunities.”

High-yield bonds can provide an income cushion not available with investment grade bonds, says Bill.

But investors need to analyse the underlying credits ultimately going into a portfolio – not just for safety but to unveil mis-priced assets, he says.

Crispin Murray’s weekly ASX outlook

Pendal’s Crispin Murray outlines two possible paths ahead for Australia:

1) The path to a soft landing

• Building inventories mean consumer price rises ease off
• Chinese re-opening eases product supply, also helping inflation
• Wages ease as a lack of stimulus means companies no longer need to pay up to induce workers to return. Companies begin to stop hiring and even lay off workers. Tesla and Amazon’s recent comments are pertinent in this regard
• Commodity prices stop rising
• As a result, the Fed doesn’t need to go harder than what’s already priced in the forward curve

2) The path to recession

• Inflation remains resilient as the economy doesn’t slow sufficiently
• Companies continue to catch up to the cost impost they are wearing
• Housing costs keep rising
• The labour market stays tight as service jobs continue to recover, workers seek compensation for higher prices and so wage growth doesn’t slow
• Supply shortages combined with the return of China continue to underpin higher commodity prices
• This leads to the Fed remaining hawkish, triggering a recession

ESG election: what Labor means for investors

The shift towards progressive politics and climate action that swept Labor to power has important implications for investors, says Pendal’s Rajinder Singh.

“It was an ESG election,” says Rajinder, who manages Pendal Sustainable Australian Share Fund.

“If you break it down, some of the key policy differences in this election were all about E, S and G.

“On the environmental side, it’s about climate change. For social issues, it was about gender and diversity in workplaces, childcare and Indigenous issues. And a federal integrity commission? That’s governance.”

Some spots to watch: new energy transmission infrastructure, investment in childcare and aged care and how a renewed focus on indigenous affairs affects not only miners but all ASX-listed companies.

“This is now a government with policies that are more aligned with the ESG trends that we’re seeing in the market.”

Labor won’t bring big change on the economic front

After the evolution of Coalition fiscal spending habits during Covid, our new Labor government won’t be a big change on the economic front, says Pendal’s Anna Hong.

“Australians will be largely unaffected, at least near term,” says Anna.

Labor will increase fiscal spending by net $7.4 billion in areas such as home equity schemes and electric car discounts.

“That will prop up demand without fixing supply issues, nudging inflation higher and making the RBA work harder to counter loose fiscal policy.” The budget will remain in deficit for the rest of the decade.

Labor may face difficulty generating planned revenue and savings. “Many items on their list such as multinational tax revenue are easy to promise but notoriously difficult to achieve. “Overall, it’s more of the same for the economy and budget. The difference will be in other changes many voters are focused on – climate policy, federal integrity and gender equity.“