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Bond holders performance outlook? More punishment to come

Bond holders performance outlook? More punishment to come

Following on from Tuesday’s 0.25% rate cut, economists expect the Reserve Bank of Australia to again cut by 0.25% in November 2012. The cash rate would then stand at 3.00% which is the same rate we saw at the low point of the GFC. This should give readers some insights into the slowdown being recorded at present. And as some commentators are predicting Australia’s terms of trade to soon decline by 15%, year on year, there is no pickup in sight.

This is reflected in Australia’s ten year Government Bonds currently yielding 2.93% which compares with ten year Government bond yields in Japan, Germany, the US and the UK of 0.8%, 1.5%, 1.6% and 1.7%, respectively. Whilst this is great news for anyone with debt, savers are being punished and are earning less than the long term rate of inflation. Worse when taxation is taken into account. We believe investors in Australian and indeed the world are in one of the greatest bubbles in the financial markets today. One in which they are happy to take negative returns but yet still face the risk of losing a lot of their capital when inevitably one day economies get moving again.

This to us is not a viable investment strategy.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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4 Comments

  1. I very much doubt James was the only one to miss the point. I fully support the opinion in the article but I think it could be said in a way that is more audience friendly. I’d expect many if not most of your audience are not involved in bonds or are only involved in bonds via fund diversification. It’s reasonable to assume a significant portion of these people are unaware of how bond markets work. When you look at this article from their perspective you see mostly negative focus (the current / short term commentary), a reference to a bubble that loosely has inverse meaning to what they expect, and then finally the long-term bullish market comment to finish that isn’t clear bullish language – by this stage a reference to the market eventually moving again is very easy to take as being market movement in the downward direction.

    • Good point. Will firmly punish the person who gave that reply! We dont have any day of reckoning in mind and we are investing and outperforming (thus far!) regardless. Its optimistic because any Bond price collapse will happen only because economy will recover and rates will head back up once deleveraging ends.

  2. More doom and gloom. It must be exciting to work somewhere where everyone is depressed about the state of the economy and the bad things that are always about to happen. When is this big day of reckoning going to happen anyway? Why worry about something that may never happen. Roger, you need to start employing some optimists to balance things out.

    • Hi James,

      I think you are missing the point of the note. It is a warning of high bond prices and the ultimate destruction of investments in bond prices when the economy turns. A turning of the economy is not ‘doom and gloom’, its a recovery.

      Thanks for your feedback.

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