Interest rates are currently at record lows but looking forward, Tyndall has said they will eventually normalise.
Tyndall AM head of fixed income Roger Bridges said that while the 1994 experience saw negative returns from bonds, it was unlikely to be repeated in the current market.
“Negative returns are about the market not anticipating properly what was going on,” Mr Bridges said.
“Now in other periods where we’ve had interest rates rises - 2003 and even 2009 - we were alerted to those two rates and the Reserve Bank pushed them back very quickly. In 2009 … we had lower returns than we’ve had before, but not negative.
“I suggest that when rates start normalising, it will be slow but we should anticipate low returns on bonds but not negative returns, and that’s the fundamental difference.”
Mr Bridges said that Australian bonds have a lower duration than foreign bonds, making them less risky if rates go up.
In the current market, it is important that investors retain a diversification to bonds to offset any deflation, he added.
“Yes, bond rates are at all-time lows and don’t expect massive returns from them. But we will not see a 1994 again … it was a very special set of circumstances," he said.
“As long as rates rise slowly, according to market expectations and the central banks, bonds shouldn’t suffer big losses.
“That means bonds still play a very important part of your diversified portfolio to offset the equity returns, which is providing you your high returns.”
