Ten-year bond yields finished 2016 at 2.77 per cent, after starting the year at 2.89 per cent, BondAdviser said.
The research house said this “masked a large amount of volatility” seen in the market, noting that 10-year yields on these bonds reached a low of 1.82 per cent in August before climbing back up.
Part of this volatility was driven by increasing political risks, BondAdviser said, pointing out that while the initial response to the Brexit vote had been supportive of bonds, “the election of Donald Trump as the next US president did the opposite, adding fuel to inflation expectations as he promised to cut taxes whilst increasing spending”.
Nevertheless, the Reserve Bank of Australia’s decision to reduce the cash rate to 1.5 per cent earlier in the year steepened the yield curve, and resulted in the ASX 200 accumulation index (11.8 per cent) outperforming the Bloomberg AusBond Composite index (2.9 per cent).
Although this rally was mainly driven by technical factors (lack of new supply combined with a number of corporate issuers redeeming but not replacing maturing securities), the floating rate note format of this sector offered investors protection against rising bond yields.
“This is due to the interest rate typically resets either on a quarterly or semi-annual basis depending upon the terms of the security,” the company said.
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