FI market volatility to decline

Oksana Patron

17 February 2023

Volatility in fixed income markets will decline this year, giving bonds the scope to provide defensive characteristics which can help offset the riskier assets, according to Western Asset.

Anthony Kirkham, Head of Investment Management/Australian Operations for Western Asset, said that as central banks get to the point where they are ready to hit ‘pause’ on monetary policy tightening, volatility will ease.

“When you look at the yield to maturity for the Bloomberg AusBond Composite Index at the end of December, it was around 4.8%, which makes bonds and bond funds with conservative characteristics hard to ignore in the context of a diversified portfolio allocation,” he said.

The Bloomberg AusBond Composite Index rose 2.8% in January and 2.2 % over the three months prior three months ending 31 January.

According to Western Asset, the Australian investment grade corporate sector is a standout due to the type and quality of issuers, with two areas in particular believed to offer value being REITs and bank covered bonds.

“REITs are a standout, mainly because of the very conservative nature of their balance sheets. And they are solid investment grade names,” Kirkham said.

“Bank covered bonds are basically trading in line with unsecured securities. We find that pricing very attractive. There’s a lot of opportunity there and we will look to continue to actively capture that in the Fund.”

“Underpinning that opportunity is greater certainty at many central banks around the speed, size and extent of monetary policy movements in the current cycle. The Federal Reserve, Bank of England and European Central Bank are among those expected to start reducing their pace of tightening as the impact of higher rates on the economy starts to show in activity levels.”