YO U R I NVE STI N G
Mr Bond Lives Again The spectre of the death of the bond is receding, writes Mark Riggall, portfolio manager at Milford Asset Management. And he suggests perhaps there’s a case for owning bonds again.
Late last year I wrote an article about the dire outlook for bonds. It was called “So, you expect me to perform? No, Mr Bond, I expect you to die”.
That compares to New Zealand shares, which have fallen by 4 per cent over the same period and global shares which are up 2 per cent over the same period.
These returns aren’t that attractive versus inflation running at 5.9 per cent, but at least now there’s a reasonable alternative to holding cash.
Declining bond returns were expected to have an impact on the performance of diversified funds that hold bonds, including KiwiSaver. They did.
Unfortunately, bond-heavy Conservative funds have borne the brunt of this, largely underperforming Growth funds on a oneyear basis to end of March, despite the falls in share markets this year.
The prospects of future returns are looking better, given these more attractive yields, but what about the risk bond prices might fall further as even-higher interest rates are priced in?
So, bonds have been a terrible investment recently, but should investors still steer clear?
In New Zealand, the Reserve Bank is expected to hike rates to over 3 per cent by the end of 2022.
Yields look more attractive The falls in bond prices mean yields going forward are now much more attractive. The yield on a five-year New Zealand government bond was around 3.3 per cent at the start of April.
In the US, interest rates are expected to rise to 2.5 per cent at the end of 2022. With global inflation high and still surging, such expectations of rate hikes are understandable.
Since then, bonds have been terrible performers. Shares have also seen some volatility this year, but global investor appetite for shares appears to be relatively undimmed, with evidence of significant buying from global retail investors this year. Is it time to switch? Can we make a case for owning bonds and is it shares’ turn to kick the bucket? Since July last year, the S&P New Zealand government bond index has fallen by around 9 per cent to the end of March 2022. WI NTE R 2 0 2 2 | I N F O R M E D I NVESTO R 4 0
Yields on offer haven’t been this high since early 2015. Yields on five-year high-grade corporate bonds in New Zealand are around 4.5 per cent.
But given the large amount of hiking already priced in, and significant uncertainty about inflation and growth outcomes on the other side, it’s reasonable to assume that we’ve already seen much of
