Fitzsimmons: 'Striking' value in Australian govt bonds

Australian government bonds are yielding 5.5% with a high level of credit quality, offering ‘striking’ value in a world of low interest rates and low bond yields, says Quentin Fitzsimmons at Threadneedle.
australia-pa

The head of government bonds and foreign exchange says the attractiveness of the Australian government bond market is due to the central bank raising interest rates for a considerable period of time, in contrast with the UK and Europe.



He says the 5.5% yield and high credit quality may be a surprise to investors, in contrast to the scramble for yield in parts of the emerging market fixed income universe.

In the fixed income markets more generally, he says the prospect of low yields and rising interest rates pose a threat to medium-term returns.

"In the second half of this year, although quite a lot is being priced in interest rate expectations in the UK and Europe, modest price hikes seem more likely than not, but we are concerned about the sustainability of any moves to higher interest rates."

But he adds even if interest rates do rise, they will probably not go up too sharply in the immediate future, due to factors such as the risk that continues to dominate the eurozone.

"Particularly in the UK, we think there is a big disconnect and a huge debate between the growth and inflation outlook.

"Growth looks moderate and will be under pressure from fiscal cuts, but at the same time, the UK does exhibit inflationary pressures. How this plays out in the interest rate markets over the next few months is something we want to exploit."