Speaking to InvestorDaily, FIIG director of strategy and market development Stephen Nash said that long duration bonds are currently trading at good value and could provide diversity with the market chasing equity yield.
“I think Australians are typically underweight in bonds, so it’s not really a question of selling bonds and buying equity for a lot of investors, it’s really selling cash to buy equities,” Dr Nash said.
“I think the problem with that is that a lot of investors haven’t really got a very good balance in the portfolio, so longer bonds provide a lot of interest rate risk, which comes in very handy if equities were to correct at all.
“The point is that by adding a lot of longer bonds to your portfolio you can really iron out that volatility, and the idea is not to just time your bond purchases, but to get a better portfolio design more broadly.”
Along with mitigating risk in a portfolio, Dr Nash said there has been a spike in the yield of Australian 30-year bonds in comparison to shorter duration bonds.
He said this is the result of a number of factors, including the cross between the Australian dollar and the Japanese yen as a result of monetary policy by the bank of Japan.
“Most people focus on that currency basis as an explanation for why the curve has steepened so much; I think it’s important, but I don’t think it’s the whole picture,” Dr Nash said.
“It’s partly the overall level of rates because a lot of market participants feel that the current rates are a temporary situation and that they’re headed towards more normal levels.”
Dr Nash said that while perceptions are that qualitative easing has affected bonds, it has impacted other areas of the financial markets, providing a strong case for portfolio diversification.
“[Quantitative easing] is distorting all markets and to a large extent, the distortion in the equity market is probably bigger than the distortion in the bond market,” Dr Nash said.
