Australian bonds increase appeal post US election: Mason Stevens

Australian fixed income is looking more attractive following the ‘red sweep’ in the US election, which consensus suggests has eased fears of a recession in the world’s largest economy and complicated the outlook for US government-issued bonds.  

Republican control of the White House and both houses of Congress – the so-called red sweep – means Donald Trump should have an easier job of implementing his proposed policies.  

Mason Stevens’ Head of Fixed Income & Markets Lloyd Mitchell said this should be supportive of the US economy, and therefore equities, but created headwinds for US government bonds.  

Mr. Mitchell has been speaking with advisers over the past fortnight about the opportunities in fixed income as part of the investment-focused platform’s investment services, which sits alongside its suite of managed portfolios. 

‘On balance Trump’s policies are stimulatory to the US economy in our view; especially the extension of tax cuts,’ he told Financial Newswire.  

‘Funding Trump’s policies will very likely require new bonds to be issued, which will drive down prices and push yields higher as markets absorb the extra supply, although that could take some time as Trump gets settled into office early next year and actual policies are confirmed through his term.  

‘Nonetheless fiscal spending will likely remain strong, in our view.’ 

At the same time, a stronger economic outlook has reduced the market’s expectations of rate cuts. 

The Federal Reserve has twice cut rates this year and markets are pricing in another three for next year. Only six months ago, that number was closer to eight. 

‘One of the current key debates in the market is if we’re not going to have a recession; do we even need to cut rates any further?’ Mr. Mitchell said. 

Combined, these factors are making US government bonds less attractive to Mason Stevens in the short term at current levels. 

Contrast this to Australia, where three factors are favouring bonds. 

Why now is the time for Australian fixed income  

‘Australian fixed income is looking more attractive to Mason Stevens than US fixed income is because we don’t have the fiscal deficit issue that the US has,’ Mr. Mitchell said.  

In addition, yields are high, and rate cuts are still expected in 2025. 

For advisers with clients focused on retirement, this could present an attractive opportunity to access equity-like returns without the same level of risk, Mr. Mitchell said. 

‘Yields are high, relatively speaking – previously 1%, now 5.5% – 7%, and they may not be here forever,’ Mr Mitchell said. 

‘There’s an opportunity therefore to lock it in for 5 to 10 years, particularly as inflation has come down from its peak and is likely to continue falling. Even if inflation falls at a slower pace, it’s still moving in the right direction.’  

It could also potentially solve for a complex and uncertain outlook for Australian equities for clients that are more risk averse. 

While unemployment is low, and state governments are investing in major infrastructure projects – both good for the economy – high inflation and interest rates continue to squeeze household budgets and impact business revenue. 

Mr. Mitchell also cautioned that a lot could change in terms of yields, both overseas and domestically, between now and Trump’s inauguration in January.  

What type of fixed income is right for my client?   

Mr. Mitchell said it came down to what sort of investor the adviser was solving for. 

If retirement focused, domestic fixed income might make sense for certain clients, offering income with lower risk than equities, he said.  

‘But for those younger demographics, you’re probably going to skew towards US equities,’ with fixed income providing diversification for ‘left field’ events. 

Mason Stevens partners with wealth management businesses to build tailored fixed income model portfolios through its Managed Discretionary Account (MDA) service offering in wealth and super, and also badge (white label) any of Mason Stevens’ in-house model portfolios to complement an adviser’s existing strategies.  

With 15 years tenure in the fixed income asset class, Mason Stevens offers advisers and their retail and wholesale clients access to a comprehensive suite of direct bond solutions by facilitating small parcel sizes and diversified portfolios.  

This capability enables advisers to offer clients bespoke portfolios or access off the shelf managed portfolios consisting of direct bonds with attractive fixed rates, yielding 6% to 7% but professionally managed portfolios can achieve even greater results. For example, returns in the Mason Stevens Retail (investment grade) has delivered 7.42% (after fees) for the year to Oct-24 and Mason Stevens Wholesale (combination of investment grade and high yield) has returned 10.16% (after fees) for the same period. Depending on the risk appetite and type of client, returns in high single digits are still attainable moving forward for portfolios that are professionally managed. These are diversified, actively managed fixed-income portfolios, requiring a minimum investment as small as $20,000.

Mason Stevens managed portfolios and bespoke services are designed to deliver both investment performance and support wealth practices in differentiating their investment services. Available in both retail and wholesale options, the portfolios invest in a range of liquid fixed income securities that aim to achieve high risk-adjusted returns, while also delivering regular cash flow streams via income and coupons.    

Fixed income ETFs are also popular with advisers and are likely to become more so following proposed regulatory changes to hybrid securities. 

Hybrids are a security that combines elements of debt securities and equity securities. 

In September, the Australian Prudential Regulation Authority announced a proposal that would see banks phase out the use of AT1 capital instruments, or hybrid bonds, and replace them with cheaper and more reliable forms of capital. 

‘We have seen advisers reduce their exposure to hybrids and look for other areas of the fixed income market to gain exposure to,’ Mr. Mitchell said. 

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Mason Stevens is a leading provider of integrated wealth platform technology that uniquely focuses on investor portfolio outcomes. More than just an administration platform, the innovative technology, paired with experienced investment specialist support, empowers advisers to deliver on their clients’ investment objectives via an unconstrained investment universe.

Established in 2010, the privately owned firm has circa A$8 billion of assets on platform. Led by some of Australia’s most experienced finance and investment professionals, the company has over 80 staff nationally with offices in Sydney and Melbourne. It’s known for its investment capability, forming genuine partnerships with clients, and unlocking new growth opportunities for wealth practices.

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