Australia may have a bond-friendly environment but now is not the time for investors to be chasing this asset class, according to ING Investment Management (INGIM).
"We definitely have a bond-friendly environment, but can I please caution not to chase bond funds at this point in time," INGIM chief investment officer Emmanuel Calligeris said.
"If you are buying a three-year bond in Australia, so you're investing client money at about 3.57 per cent, and in the event that interest rates get back up to 5 per cent bond funds will lose capital."
If investors have not invested in bond funds to date, they should seriously consider whether now would be the best time to buy into this asset class, Calligeris said.
"We got into bonds in our portfolio on 1 September 2008 and we were still seeing yields of close to 6 per cent, but we're now thinking about selling," he said.
"So can I please caution you not to look at last year's returns and think you'll get the same kind of returns this year."
Bonds will be a poor investment when the market eventually corrects, according to Calligeris.
"In the event that over the next year the economy grips, or in other words the rubber hits the road and instead of skidding it actually grips and the plane can actually stop, bonds look like a very poor investment," he said.
"The inflationary repercussions that are likely to occur in the back end of 2010 into 2011 don't look very good, unless they start increasing interest rates in a very timely way. So it's something to look out for."
