Despite the recent market sentiment of people in the Australian pension funds market investing into bonds due to its lower risk against equities, there is confusion in the market about whether that is the reality or if investors are moving away from bonds as foreign ownership increases.
"There is a lot of confusion at the moment. A lot of the investment advisers and planners that we talk to have said that they have never been more perplexed as to where the economy is going and where the world is going over the next couple of years," Pimco head of global wealth management in Australian Peter Dorrian told InvestorDaily.
"I don't think there is really a very strongly held view but those that do have a strong view are probably more bearish at the moment."
"We have seen a massive trend where advisers have been increasing their client's level of exposure to bonds in their client's portfolio and I think that will continue in 2012 because people are sick of the volatility in the equity markets and are just wanting to have a bit more peace out of their portfolio."
He explained that the Australian market has been at a consistently low level on the institutional level and there has been a complete change of view in the past two or three years on the individual investor level.
Ibbotson head of fixed interest and currency Brad Bugg told InvestorDaily that in reality, allocations of funds are declining as foreign ownership increases.
"Foreign ownership of Australian bonds has gone up and yields are coming down which makes Australian bonds look expensive on a global basis."
"People are allocating away from bonds into cash because they can get a better return. This is driven by technical offshore demand."
He explained that the trend for investors to rotate out of bonds and into cash is similar to the trend during the global financial crisis (GFC).
"If Australia's bond rates stay where they are then the strong likelihood is that people will retain their preference for cash."
Tyndall AM head of fixed income Roger Bridges agreed that if the GFC worsens and Australia remains stable then bonds will continue to decline.
"If Europe doesn't sort itself out then everybody is going to be detailing and bonds will obviously go even further. Australian rates are very high. The Australian dollar has held up very well, but if it becomes a global tightening, the questions are will the Australian dollar be able to do what it has done in 2011 and will people get out of their bonds," Bridges told InvestorDaily.
"Australia technically has too much [invested in] equities compared to bonds and that has always been an issue."
"The Australian market has tended to trade between 5or 6 per cent over the last decade and maybe with 10 year bonds at 4 per cent people are saying 'enough is enough'."
"I think fundamentally, bonds have had a good rally. Will they go further? If everything goes wrong in the world then they probably will go further but you probably will get some back up. So maybe some cash funds have taken profits on bond holdings but at the same time I think generally they don't have enough bonds in their portfolios compared to probably growth assets."
