The Point

Amy Xie Patrick: Turbulent conditions require a decisive, active approach to fixed income

Fixed-income investors looking for lower yields – and therefore higher prices on their bond investments – may be disappointed with the recent cycle.

“When I’ve been speaking to clients over the past few weeks, many have been worried that the cutting cycle is not translating to lower bond yields in the same way we’ve seen previously,” notes Pendal’s Amy Xie Patrick in her latest fast podcast.

But investors need not be concerned, since conditions still favour a rate-cutting environment, says Amy, who leads Pendal’s fixed-income strategies.

Underlying inflation is under control – supported by a looser US labour market which has not yet been impacted by President Trump’s mooted immigration crack-down. n Australia a tighter labour market has not led to significant wage increases.

“The market’s priced in two more US cuts this year, maybe another two in Australia.

“The RBA has enough room to get back to neutral fairly quickly… And the Federal Reserve probably has the ability to move a little bit more than the market’s priced in.

“It’s still a choppy year ahead – but this is where a proven active process for duration and rates really does count for fixed-income portfolios.”

Tune in now

Tim Hext: Hold course in the face of Trump’s whipsaw tariffs

Investors could not be blamed for feeling a bit queasy at Donald Trump’s whipsaw approach to tariffs.

“The tariff threat does add to this argument that inflation isn’t about to come down anytime soon,” says Pendal’s head of bonds strategies Tim Hext in our latest Fast Podcast.

“The market is right to be a little bit concerned. Obviously free trade – or some version of free trade generally benefits both parties.

“The law of comparative advantage says you end up focusing on what you are a cheap producer of. If you start to throw sand into the gears of free trade that’s not a good thing.

“Ultimately, I think it is bad for growth and will mean slightly higher inflation, but not enough to suddenly cause rate hikes in the near future.”

“It creates a lot of short-term noise, but fortunately investors with a medium-to-long-term time-frame can leave it to people like me to worry about that.”

Tim says investors should hold course for now.

Rates, China, Trump: Pendal’s Amy Xie Patrick on the trends that will shape 2025

One of the surprises of 2024 was the absence of rate cuts in Australia. What happened and how long will the Reserve Bank sit on its hands? Pendal’s head of income strategies AMY XI PATRICK explains in this review of 2024.

Tim Hext: Why Aussie fixed-income investors can largely ignore a potential August rate hike

Australia appears to be at different stage of the rate cycle compared to international peers – a “lagging cycle compared to the rest of the world”, as Pendal’s Tim Hext puts it.

“Globally, people are looking at very high interest rates and going, ‘We just don’t need them anymore.’

“In Australia, though, inflation’s proven to be quite sticky around 4 per cent in the last couple of quarters. The RBA’s patience is being tested.”

August is a live meeting in terms of potential rate changes and next week’s CPI figures will be key to the decision, says Tim – Pendal’s head of government bond strategies – in a new fast podcast.

A higher-than-expected number could prompt a hike. A lower-than-expected number would mean rates stay where they are.

However, if an August rate hike eventuates, investors should largely ignore it, he argues.

Fixed income: the likely impact of rates, inflation and a Trump presidency

Services – particularly wages and rental inflation – have held up prices recently. But Pendal’s forward indicators show the drivers of these two factors weakening.

That means inflation in developed markets should continue to fall and central banks globally can start cutting rates, says Pendal’s head of credit George Bishay.

It’s a bullish scenario for bonds as well as credit and equity markets, he says.

But one of the risks for that scenario is a Donald Trump victory in November.

“If Trump wins the election, will he have the ability to change policy? Will he have a majority in both houses of Congress?

“If he does, that’s problematic for bonds because ultimately that’s likely to be inflationary,” says George.

The impact of a Trump presidency is more skewed towards longer-term bonds because his policies would likely have a medium-term impact on inflation, George says.

“The short end should continue to perform because central banks will be easing rates as current inflation comes down.”

Are we getting over-confident on falling inflation? Tim Hext reviews the evidence

Investors have been getting used to good news on inflation.

But does the latest US data suggest we’re getting ahead of ourselves? Pendal’s head of bond strategies Tim Hext reviews the evidence in this week’s fast podcast.

There is still opportunity in government bonds, despite US inflation data surprising to the upside, says Tim.

“People like myself are paid to worry about weekly fluctuations, but I think for investors the trend is still in place.

“We have higher interest rates than we need given the inflation backdrop now, as opposed to 12 months ago.

“Central banks have recognised that and will deliver on cuts. The theme is still lower rates in the US across the year, and Australia will likely follow towards the back after the year.”

Tim expects rates to fall from 4.35% to around 3.6% by the end of this year and possibly lower in 2025.