Aussie bonds take the edge on global counterparts

The Australian fixed income market is headed for a solid year in 2010, with the local bonds market in a better position than its global counterparts, according to Intech. However, while the market offers a relatively good bet over the next 12 months, performance is unlikely to stand out significantly, the firm said.

Intech predicts that further rate rises, increasing government and semi-government issuance combined with a more benign contraction in credit spreads is likely to see returns fall short of their longer run average returns of 5.5-6 per cent. However, any shortfall is unlikely to be substantive as markets have already accounted for these for 2010 by pricing a 5 per cent rise in interest rates by year end and as a result, Australian bonds are unlikely to appear attractive on a standalone basis. But bonds will hold greater appeal in the context of a broader global fixed income portfolio.

Longer term economic recoveries, rises in interest rates from near zero and huge government issuance programs in developed markets around the world will see Australia’s bonds positioned favourably over the short to medium term with excess returns over most other developed global bond markets expected, Intech said. However, the firm stressed performance will be determined by a slow and gradual recovery in the global economy. Another negative shock or economic downturn could place Australian bonds in an even stronger position, it added.