For some of Australia's biggest investors, a recession is a certainty, and they're buying bonds to position for the slowdown.
AustralianSuper Pty and Australian Retirement Trust, the nation's two biggest pension funds by assets, favor buying bonds as a ballast against the impending economic downturn. The sovereign wealth fund, the Future Fund, has also beefed up its holdings of government debt. "You want to buy bonds essentially when the yield curve is inverted, when the market thinks policy's really tight," said Mark Delaney, who helps oversee the equivalent of $182 billion as chief investment officer at AustralianSuper, referring to the debt market's favored signal for a recession. "We've substantially increased our allocation of bonds," he said. "We'll just keep on buying at better levels."
The positive view toward fixed-income assets stand out amid a wave of investors — many of whom also see recession looming — ditching bonds as the Federal Reserve and the European Central Bank signal ever higher policy rates to tame inflation. The question though is just how much protection debt markets will offer on the way to a downturn and the best strategies to navigate the harshest monetary tightening since the 1980s.
Bond investors are back in the spotlight after the best start to a year on record for debt markets unraveled in February as traders realized bets on pivots by central banks were premature. They have to find a balance between capturing some of the highest yields seen in decades and buying too much too early. They also have to contend with increasing market volatility as the collapse of Silicon Valley Bank spurred the biggest two-day plunge in short-maturity U.S. yields since the collapse of Lehman Brothers Holdings 14 years ago.
For Ian Patrick, chief investment officer of Australian Retirement Trust, which oversees the equivalent of about $160 billion, the strategy is to increase the duration of some bond portfolios by between 50% to 80% to capture sensitivity to rate changes.
Rates near 4% mean "the capacity for bonds to play that defensive role in a recession is significantly stronger than it was before," he said in an interview.
Anna Shelley, chief investment officer at AMP Ltd. in Melbourne, echoes the view.
Bonds are "back to having that ability to provide protection, particularly if we do get a much harder recession than is currently priced into market," said Ms. Shelley, whose firm oversees A$105 billion in retirement assets. There's "a chance that either inflation is stickier or harder to bring back into that targeted band that central banks would like to see," she said.
AMP has reduced its underweight in bonds to a neutral position, and Ms. Shelley predicts a mild downturn in the US.
