Fund managers said that they have a positive outlook for the Australian fixed income market as the mining boom and large capital expenditure programs continue to fuel the nation's growth.
"I expect 10-year bond yields to continue trading at between five and six percent, with the possibility of a short-term rise before returning to the current levels, and Australia is in a healthy shape despite risks in much of the world," Tyndall Investments head of fixed income Roger Bridges said.
Tyndall expects the cash rate to rise to 5.5 per cent by year end, he said.
"This reflects the investment boom on the back of the terms of trade, and ongoing low unemployment due to our resilient banking system and growth in emerging markets such as China," he said.
"While attention has focused on growth in the resources sector, and particularly mining, data shows that growth is happening over the wider economy.
"For instance, the latest Australian Bureau of Statistics study shows that companies are planning to make significant capital investment over the next few years, expecting this to grow by 23 per cent this year, and 32 per cent next year."
UBS head of investment strategy and consulting George Boubouras said that investors should focus on quality investment grade corporate bonds at every opportunity in 2011.
"Any spread widening in quality investment grade bonds is an opportunity to buy. Credit conditions remain solid at the macro level," he said.
ING Investment Management head of fixed income Greg Michel last month said Australian bonds would continue to outperform their global counterparts.
The global appetite for Australian bonds is likely to continue with investors drawn to current yields of 5 per cent to 6 per cent, outstripping available yields available from global alternatives, he said.
"The Australian economy has proven to be resilient to the effects of the global financial crisis and continues to expand at a robust pace. The bond market has been in a bear market phase since early 2009 and bond yields are now close to long term average levels."
He said global bonds are expected to deliver flat to negative returns in 2011.
Bridges said that despite the strong outlook, investors should be aware of the risks.
"The Reserve Bank of Australia needs to slow some sectors down if it is to manage inflation risk, so interest rates will inevitably rise, but the timing is still an unknown which means that some uncertainty is affecting companies," he said.
He also said that high oil prices could potentially derail growth around the world.
"With US consumers only just starting to spend again, this could become a problem. Food prices, and the link to political unrest, are also a possible risk," he said.
"US policy decisions are another concern, including whether the government can wind down the quantitative easing package without reigniting inflation."
Due to these considerations, Tyndall was positioning its bond portfolio with a slightly short term duration and is currently overweight in commonwealth government securities, which the fund manager usually avoided because of the liquidity premium, he said.
"We are also selling down semi-government securities which we see as having higher risk, and monitoring credit which is providing good value at the moment," he said.
