It is noteworthy that bond yields have fallen back to very low levels while the US and Australian equity markets have continued to push higher, reaching record highs. Are bond investors foretelling a significant slowdown in global growth that equities investors are ignoring?
We believe bonds are likely being influenced by multiple factors beyond the near-term growth outlook. Importantly we expect a number of these influences to wane over the coming 6 to 12 months. Ultra-low yields at the time of a broadening recovery, perky inflation, reduced central bank buying (tapering) and a resumption of heavy issuance suggests an unattractive risk-return for bonds in our view. Equities still look attractive on a 12-month view (at least), although equities may also face headwinds later in the cycle as excess liquidity is withdrawn.
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Written by
David Cassidy, Head of Investment Strategy
David is one of Australia’s leading investment strategists.