2015 may see bonds' fortunes reverse
This year may mark a change in the psyche of the bond market, it has been predicted.
Tuesday, January 27th 2015, 6:00AM
by Susan Edmunds
Bonds have posted strong returns over the past year as interest rates have stayed near historic lows.
But Mark Brown, of Harbour Asset Management, said that could be set to change in 2015, particularly in the global market.
“The return on corporate bonds last year was in excess of 7% and we’re unlikely to get that again this year. Yields have fallen a long way to get the returns we’ve had and it’s more realistic to think long-term rates will be higher.”
He said global rates were expected to rise even though the European Central Bank is set to enter a quantitative easing phase.
“Markets are already down a heck of a long way in anticipation of that,” Brown said. “They view is that the data in the US and the global economy is not too bad this year.”
The US Federal Reserve could be expected to hike rates in the middle of the year, he said.
“That will have the effect of changing the psyche in the bond market.”
Closer to home, Brown said the big question for domestic bonds’ performance would be how the Reserve Bank would react to the prospect of very low CPI.
Headline inflation is expected to be close to 0% over the next six months and the Reserve Bank will have to have a plan to get it back to its stated target of 2%, the middle of its target band.
“What is the Reserve Bank going to have to do?” Brown said. “Is there enough tightness in the economy to get inflation in its own right?”
He said another big factor would be the direction of the currency – it has been suggested that the dollar is about to undergo a correction to get it back to more historically normal levels against the USD.
Another issue would be whether the Reserve Bank decided to cut rates despite its misgivings about what that might mean for the housing market, he said.
“That will influence how interest rates behave over the year. If they cut rates that would mean [domestic bond] yields go a bit lower and returns are okay. That’s the key issue from a domestic point of view, it’s tied in with the currency.”
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