Sell-off on bonds ease

Rob Da Silva

Fixed income investors can breathe a sigh of relief, as the worst of the recent sell-off in credit instruments could be over amid growing opportunities for capital gains, according to the fixed income managing director of Principal Global Investors Asia-Pacific, Rob da Silva.

As speculation grows around expected interest rate cuts by the Reserve Bank later this year, da Silva said many investors believe the recent volatility in the markets is priced into bonds and credit instruments.

“With the economy slowing and prospects of a near-term cut in interest rates increasingly likely, it suggests a move away from equities by investors, with bonds and government bonds being a primary beneficiary. You could argue that the market has priced in a recession and, possibly, it’s not a bad time to invest,” he said.

According to da Silva, while bonds are looking strong, the risk of further sell-offs with equities remains.

“Equity markets do seem to be playing catch-up right now. There is the risk with equity markets that they will remain weak for a period of time.”

Da Silva said the credit market remains fragmented, money markets are still very nervous about events in the US and there is the possibility of further volatility.

“You could argue that the credit sector has priced in a very gloomy outlook, a severe slowdown, which is making bonds a very interesting investment opportunity. While default rates have been creeping up, they are still low compared with the US.”