RBA activity prompts T. Rowe Price to take Aussie bond overweight
T. Rowe Price is beginning 2024 with an overweight stance on Australian bonds as it believes the Reserve Bank of Australia (RBA) is lagging other markets when it comes to easing monetary policy.
In an asset allocation note, the fund manager said it is overweight on Australian bonds and neutral on Australian equities as there is negative sentiment and undemanding earnings forecast.
It noted the RBA is more hawkish and less likely than other markets to pause or cut rates, and has instead indicated there could still be more hikes ahead. A misstep by central banks would be a key risk to global markets, it said, as well as deeper growth retrenchment, sticky inflation and geopolitical tensions.
Rates have risen by more than 4 percentage points since May 2022 in Australia, and currently sit at 4.35 per cent.
The firm’s multiasset investment team said: “The RBA is marginally more hawkish than the other central banks, suggesting that its pivot is not imminent. Higher interest payments will negatively impact consumer spending with a lag.
“As the market digests the higher for longer narrative from the RBA, long-term yields should start to reflect the progressive drop in economic momentum associated with restrictive monetary setting.”
However, there are other positives for the country around the jobs and housing market.
“The housing market is resilient in supporting the wealth effect, the job market and associated wage growth surprise. On the upside, the government has some firepower to add fiscal stimulus if the economy deteriorates further.”
As well as being overweight on Australian bonds, T. Rowe Price is also overweight on cash, global high yield, emerging market dollar sovereigns and emerging market local currency bonds.
“Cash continues to offer attractive yields as central banks remain broadly higher for longer, and provides liquidity should market opportunities arise.
“Attractive yield and reasonable spread levels remain supportive [for global high yield]. Default rates are likely to rise to historical long-term averages, although much appears to be priced in.”
AUTHOR
Laura Dew
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