Global bonds are still an attractive proposition for Australian investors despite the likelihood of low yields and weak world economic growth over the next few quarters, according to PIMCO.
"From an Australian investor's perspective, clearly the low level of notional yields on global bonds is probably a bit of a sticking point if you compare 10-year Australian bonds at 5.25 per cent to 10-year United States bonds at 2.5 per cent," the fund manager's head of global product management David Fisher said.
"On the surface that doesn't look like a terribly attractive yield. But we would argue that it's important to look at the yield on global bonds on a hedged basis.
"So, for instance, that 2.5 per cent 10-year US Treasury yield when hedged back into Australian dollars becomes slightly more than 7 per cent."
When investors hedged out currency risk associated with the dollar, not only is the volatility of their portfolio reduced but the yield is boosted because of Australia's relatively high cash rates, he said.
"Despite the fact that the nominal yield is lower you pick up carry, pick up yield when you're buying global bonds. So from an Australian investor's perspective we think that global bonds remain a pretty attractive option," he said.
Fisher reaffirmed that PIMCO expects global gross domestic product (GDP) growth to remain weak over the next few quarters as fiscal stimulus effects fade while private sector demand remains weak.
Australia, on the other hand, is likely to see growth supported by both strong domestic demand and its links to fast-growing emerging economies.
"The main global growth engines will continue to be emerging economies, with China the most powerful driver, but with major countries elsewhere in Asia and in Latin America contributing as well," Fisher said.
"Still, emerging economies' substantial trade and financial linkages with the developed world means the emerging world remains vulnerable in the event a deflation and double-dip scenario comes to pass in the industrialised world."
