![]() The yield at which investors in VanEck Australian Corporate Bond Plus ETF (PLUS) would break even in 12-months’ time is about 6.75%, or 115 basis points above where it stands today. For corporate bonds, the carry is higher. The income earned on the current 10-year Australian Government bond note provides a return buffer that would allow investors to break even, even if the yield increases by 37 bps to 3.90% over the next year. The combination of wide spreads and fallen prices means that ‘carry’ is once again providing fixed income investors a cushion. More specifically, as credit spreads have also widened, there is greater magnitude for income the further out the credit risk curve. Another positive is that the price of incremental risk in some fixed income markets has de-compressed. The silver lining, is that now the yield on bonds is closer to, or in some instances higher, than the rates at the long end of the curve. ![]() ![]() Past performance is not a reliable indicator of future performance.Ĭhart 2: Credit Spreads of Australian Corporate bonds Source: Bloomberg, data to 30 November 2022. The Australian Government Bond 10 Year more than doubled to 3.53%, Australian credit spreads widened to above COVID-19 highs and this has been reflected in the returns of Australian corporate bonds.Īustralia’s corporate bond benchmark, the Bloomberg AusBond Credit 0+ Yr Index (AusBond Corporate) has suffered a maximum drawdown beyond 9%, its biggest ever fall, well beyond the falls of the 1994 bond crash.Ĭhart 1: Drawdown of Australian Corporate bonds Needless to say, the rises in yields and spreads over the past 12 months have been higher by several orders of magnitude, and capital losses have therefore been severe. The ‘carry cushion’ quantifies how much yields relative to duration can increase before a bond investment return over a 12-month period becomes negative.Īt the start of the year when Australian 10-year government bonds were yielding 1.60% (as of 31 December 2021), not only was the current income negligible, it was only enough to absorb a 0.18% rise in yield over the next 12 months before an investor was underwater on a total return basis. Making the problem more acute for bond investors, who a couple of decades ago could rely on reasonable current income to mitigate price losses when yields were rising, quickly discovered in this environment, that current income was too low to provide a ‘carry cushion’ in mitigating unprecedented price falls. XCO2 - Global Carbon Credits ETF (Synthetic).GPEQ - Global Listed Private Equity ETF.EBND - Emerging Income Opportunities Active ETF (Managed Fund).SUBD - Australian Subordinated Debt ETF.GCAP - Global Capital Securities Active ETF (Managed Fund).PLUS - Australian Corporate Bond Plus ETF.REIT - FTSE International Property (Hedged) ETF.IFRA - FTSE Global Infrastructure (Hedged) ETF.QSML - MSCI International Small Companies Quality ETF.GOAT - Morningstar International Wide Moat ETF.EMKT - MSCI Multifactor Emerging Markets Equity ETF.QHAL - MSCI International Quality (Hedged) ETF.ESGI - MSCI International Sustainable Equity ETF.GRNV - MSCI Australian Sustainable Equity ETF.DVDY - Morningstar Australian Moat Income ETF.In fact, there have only been three other times that bonds have been this oversold: 1932, 1980 & 2008. In the following chart, current bond prices are at a significant spread to the moving average. Bonds also had the same stellar performance during the Great Recession of 2008 when prices fully rebounded in 19-months!Ī reliable indicator of oversold conditions in the bond market is to measure the current price of the Dow Jones Corporate Bond Average versus its 40-week moving average. During the Great Depression, Dow Jones Corporate Bond Average eclipsed its 1929 level by 1933. ![]() Unlike common stocks that have annual losses 28% of the time (with one-third of those being multi-year bear markets), corporate bonds have losing years only 16% of the time and rarely have consecutive bad years.Ĭorporate bonds are also famous for quicker recoveries than stocks in financial calamities.
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