Home > Resources > Video Library > March 2024 Update from the Australia Trade Floor
Economic and Market Commentary

March 2024 Update from the Australia Trade Floor

Portfolio Manager Aaditya Thakur discusses why now is the best opportunity in over a decade to de-risk from equities into fixed income without giving up much return.

More from this section

Read Transcript

Text on screen: David Orazio, Account Manager

Orazio: Hi, and welcome to this month's Trade Floor Update. Today, I'm joined by Portfolio Manager Aaditya Thakur.

AT, thanks for joining us today.

Now, we're hearing from advisers that many of their clients are in fact waiting for the RBA to start cutting rates for them to reallocate back into fixed income in a meaningful way. What's your take on this approach?

Text on screen: Aaditya Thakur, Portfolio Manager, Fixed Income, Australia and Global

Thakur: Yes, it's understandable to see this kind of hesitancy. I think clearly people are still anchored in fixed income markets through 2022 and the first half of 2023. And this kind of recency bias though, is a bit of a mental trap.

As investors, we need to be forward looking. And when you look at the current economic environment, three things are really clear. Inflation is coming down back towards central bank targets. Growth is now slowing to below potential and that means unemployment rates are creeping higher around the world. So that's keeping central banks firmly on hold and they're now explicitly telling us that they will be thinking about easing in the second half of this year.

Now, there might be a little bit of volatility as markets continually re-price exactly when rate cuts will happen, and the degree of the cutting cycle. But ultimately, the range of possibilities or the distribution of outcomes is narrower now than it was over the last two years. So that's helping to bring volatility down and keep bonds in a fairly range bound environment. And that means investors can earn a positive carry given attractive starting yields of 4 to 6% for core bond portfolios.

Now, we tried to put some numbers around this in terms of what does the history tell us. And as you can see in the first chart here, we’ve gone back and had a look at the last 40 years of Fed hiking cycles and looked at 12 month forward returns for bonds relative to when they reached their peak in the cash rate cycle.

As you can see, bond returns start to turn positive on average about four months prior to reaching the peak in the cash rate. And they really turn very positive around eight months after the peak is reached. That's typically when economies have tipped over into recession.

Now, as it stands, the Fed has been on hold for six months, the ECB for five months and the RBA since November. So really, history is telling us this is the optimal time to allocate to fixed income. I'd put it a little bit more simply, the time to buy insurance is when it's cheapest. When you're getting paid 4 to 6%. If you wait for when you really need it, it's going to be too late.

Orazio: That's a great way of putting it. Now, thinking about the high yields on offer in fixed income today, you did mention obviously high quality core bonds yielding 5, 6%. Great attractive entry point for investors. Now, in January and February we've seen some record levels of corporate issuance, particularly in the Australian marketplace. Can you talk us through what opportunities this presents investors?

Thakur: Yes, it's definitely been one of the biggest and most busy starts to the year in terms of primary markets. They've had some CapEx plans that they've deferred over the COVID era, which they're now starting to put in place. So they've got some funding needs.

A good example are the airports. They need to build new runways, new terminals, particularly given the population growth that's forecast over the next ten years. So we've had transactions from Perth airports, Brisbane airports doing 7 to 10 year deals coming at yields of 5.6 to 5.9.

We've had Telstra, again a very  defensive and monopolistic company, issuing ten year bonds at around 5.6%. And more recently we've had Aurizon Networks come, they are a rail transport operator in Queensland in the commodity sector, again a monopolistic and regulated asset base, high quality, and they've been issuing seven and a half year bonds at around 6.1%. So really attractive defensive high-grade bonds at yields which are not too far from forward earning yields for equities.

So when we look at it in an aggregate sense, as the second chart shows, looking at the yield to maturity on the Australian Composite Bond Index compared to the forward earnings yield for the ASX 200, that spread is the tightest it's been in over a decade. Whereas our discussion earlier was really about macro top down reasons to invest in fixed income, even from a bottom up perspective, you're seeing really attractive opportunities where investors can deallocate from equities into core fixed income and really not give up that much return. Again, this is one of the best opportunities to do so over the last decade.

Orazio: Thanks AT, I really appreciate your insights today.

Now, as you've heard today, the fixed income market offers a wide variety of opportunities for investors to build robust, high quality portfolios that generate really attractive levels of income.

We'll soon be embarking on a national roadshow around the country with our portfolio managers who will delve deeper into many of these opportunities. If you'd like to attend, please look out for your invitation, visit our website, or contact your PIMCO account manager.

Filters: Reset All

Filters

Close Filters Dropdown

  • Tags

    Reset

    Close

  • Category

    Reset

    Bond by Bond
    Careers
    Economic and Market Commentary
    Investment Strategies
    PIMCO Foundation
    PIMCO Education
    View from the Investment Committee
    View From the Trade Floor
    Viewpoints
    Education
    Close

  • Order By

    Reset

    Alphabetical
    Most Recent
    Close
() filters applied

Multimedia Finder

Filter By:
  • Bond by Bond
  • Careers
  • Economic and Market Commentary
  • Investment Strategies
  • PIMCO Foundation
  • PIMCO Education
  • View from the Investment Committee
  • View From the Trade Floor
  • Viewpoints
  • Understanding Investing
  • A
  • B
  • C
  • D
  • E
  • F
  • G
  • H
  • I
  • K
  • M
  • N
  • P
  • R
  • S
  • T
  • V
  • W
  • Y
  • Z
Clear
Berdibek Ahmedov
Product Strategist
Andrew Balls
CIO Global Fixed Income
Justin Blesy
Asset Allocation Strategist
Meredith Block
ESG Research Analyst
Adam Bowe
Portfolio Manager, Australia
Allison Boxer
Economist
David L. Braun
Portfolio Manager
Jelle Brons
Portfolio Manager, Global and U.S. Investment Grade Credit
Nathaniel Brown
Director of the PIMCO Foundation
Erin Browne
Portfolio Manager, Asset Allocation
Grover Burthey
Portfolio Manager, ESG
Libby Cantrill
U.S. Public Policy
Yishan Cao
Credit Research Analyst
Kenneth Chambers
Fixed Income Strategist
Stephen Chang
Portfolio Manager, Asia
Devin Chen
Portfolio Manager, Commercial Real Estate
Richard Clarida
Global Economic Advisor
Mathieu Clavel
Portfolio Manager, Alternative Credit
Tony Crescenzi
Portfolio Manager, Market Strategist
Harin de Silva
Portfolio Manager, Special Situations
Pramol Dhawan
Portfolio Manager
Matt Dorsten
Portfolio Manager, Quantitative Strategy
Jason Duko
Portfolio Manager
Devin Ekberg
Senior Consultant, Advisor Education
David Erdonmez
Head of Research, Consultants and Product Group, Australia
David Fisher
Co-Head of Strategic Accounts, U.S. Global Wealth Management
David Forgash
Portfolio Manager
Preeyam Gandhi
Strategist
Max Gelb
Product Strategist
Nick Granger
Portfolio Manager, Quantitative Analytics
Adam Gubner
Portfolio Manager, Distressed Debt
Sachin Gupta
Portfolio Manager
Daniel H. Hyman
Portfolio Manager
Daniel J. Ivascyn
Group Chief Investment Officer
Mark R. Kiesel
CIO Global Credit
Erica Kinsella
Product Strategist, ESG Strategies
Sean Klein
Head of Client Business Strategy – Client Solutions and Analytics
Kristofer Kraus
Portfolio Manager
Jason Mandinach
Head of Alternative Credit and Private Strategies
Kyle McCarthy
Alternative Credit Strategist
Robert Mead
Head of Australia, Co-head of Asia-Pacific Portfolio Management
Lalantika Medema
Alternative Credit Strategist
Mohit Mittal
CIO Core Strategies
John Murray
Portfolio Manager, Global Private Real Estate
John Nersesian
Head of Advisor Education
Roger Nieves
Sonali Pier
Portfolio Manager, Multi-Sector Credit
Gavin Power
Chief of Sustainable Development and International Affairs
Lupin Rahman
Portfolio Manager
Paul W. Reisz
Fixed Income Strategist
Graham A. Rennison
Quantitative Portfolio Manager
Steve A. Rodosky
Portfolio Manager
Jerome M. Schneider
Portfolio Manager
Marc P. Seidner
CIO Non-traditional Strategies
Emmanuel S. Sharef
Portfolio Manager, Asset Allocation and Multi Real Asset
Greg E. Sharenow
Portfolio Manager, Commodities and Real Assets
Kimberley Stafford
Global Head of Product Strategy; Responsible for Sustainability Oversight
Jason R. Steiner
Portfolio Manager, Private Lending and Opportunistic Strategies
Christian Stracke
President, Global Head of Credit Research
John Studzinski
Vice Chairman
Aaditya Thakur
Portfolio Manager, Australia and Global
François Trausch
CEO and CIO of PIMCO Prime Real Estate
Matt Tuten
Portfolio Manager
John Valtwies
Account Manager, Global Wealth Management
Megan Walters
PIMCO Prime Real Estate
Taosha Wang
Qi Wang
CIO Portfolio Implementation
Jamie Weinstein
Portfolio Manager, Corporate Special Situations
Paul-James White
Portfolio Manager
Tiffany Wilding
Economist
Jerry Woytash
Portfolio Manager, Short-Term Desk
Nelson Yuan
Kirill Zavodov
Portfolio Manager, Real Estate
Mike Cudzil
Portfolio Manager
PIMCO
Seray Incoglu
Portfolio Manager, Commercial Real Estate
Ben Bernanke
Chair, Global Advisory Board
  • Alphabetical
  • Most Recent
Section : Date : Experts :
Reset All
What to Expect When You’re Expecting Rate Cuts
Exploring the trends and opportunities in private credit today
April 2024 Update from the Australia Trade Floor (video)
Opportune Time for High-Quality Global Bonds
Today’s Historic Opportunity in Actively Managed Bonds (video)
Celebrating International Women’s Day

Load more results Load {{cCtrl.fetchResults}} more results