For the first time in years, bond yields are looking more attractive than dividend yields, according to global asset manager Franklin Templeton.
Notably, while major economies such as the United States have witnessed the inverted yield curve, so too have peripheral economies such as Canada and New Zealand.
However, Franklin Templeton fixed income managing director and portfolio manager Chris Siniakov has suggested that the yield curve in Australia is bordering on flat, or momentarily inverse.
“This gives us an opportunity to allocate our portfolios to different parts of the curve that are going to benefit the most,” Mr Siniakov said.
“In Australia, we are positioned in the very short end of the yield curve. We think that is most attached to forward-looking policy expectations.”
Franklin Templeton projects that central banks are coming to the end of their tightening cycles and are likely to ease rate rises, if not in 2024, than certainly through 2025. As such, the asset manager has taken the stance of staying away from longer-dated bond yields.
“In recent weeks, the yield curve has steepened up, primarily led by the United States, where long-end yields, 10-year and beyond, have started to shift higher quite materially and sharply, which is causing, again, negative outcomes for broad fixed income portfolios,” Mr Siniakov added.
“However, we feel we are in a really good place to navigate through this environment.”
According to Mr Siniakov, duration has been a big question all year.
“We see clients moving away from shorter-dated, absolute return-style portfolios towards more traditional fixed income, index-focused portfolios, where greater duration is in the order of five years at benchmark level.”
This, he felt, might be premature.
“We are long duration, but we’re certainly not limit long. And a lot of investors ask us, why aren’t we limit long? And it just comes down to risk management in what’s still a very volatile, choppy environment for bond markets.”
Notably, some global bond markets, such as the United States, are seeing negative returns play out for a third consecutive calendar year.
While Australia may get a positive return, Mr Siniakov explained that “it’s certainly nothing to get excited about”.
“We prefer to keep duration still in our pocket but really focus on getting the right yield in the portfolio, because what we’re seeing transpire through calendar year 2023 is the yield of the portfolio delivering, not the capital gains from a rally in bond yields,” he concluded.