The Point

Income and fixed interest: Pendal’s quarterly deep dive into the themes driving Australian markets

Pendal’s income and fixed interest team has just published its quarterly deep dive into the themes driving Australian markets.

In the latest edition, head of government bond strategies Tim Hext explains how the RBA’s liquidity system affects investments – and why Australians need to honestly appraise the liquidity of their funds.

Head of income strategies Amy Xie Patrick explores which kind of income funds are best suited to the likely economic landing scenarios.

(Hint: not one-dimensional funds).

Senior credit analyst Terry Yuan writes about a recent transformation in the credit bond issuance market which has led to a number of deals becoming heavily over-subscribed.

An unprecedented shift from a buyer’s market to a seller’s market has led to significant changes in pricing dynamics, Terry says.

Lastly, senior ESG and impact analyst Murray Ackman has a quick guide to the key questions investors should ask about sustainable investing opportunities.

Murray Ackman: Why we bought Australia’s first Commonwealth green bond

Australia has joined other sovereign nations in issuing an inaugural Commonwealth green bond.

There are several reasons why Pendal invested in the bond. Here are a few, according to senior ESG and impact analyst Murray Ackman.

Firstly, we want the first Commonwealth green bond to support new projects. “This is known as additionality – that is, funding something that would not have been funded but for this green bond,” Murray explains.

Secondly, Pendal examined whether the bond funded revolutionary projects. “We would like to see more catalytic change, but for the very first Commonwealth Green Bond, we are pleased with the scope of projects.”

Pendal was also satisfied the bond included clear reporting on impact as well as performance.

“The government made the commitment to have independent verification of allocation and impact reporting.

“We are hopeful that this bond will demonstrate what the minimum requirements are for clear and transparent reporting for green bonds in Australia.”

Tim Hext: Investors are still relaxed about the inflation outlook

Despite a narrative around re-emerging inflation, Australian investors are remarkably relaxed about the outlook for prices, observes Pendal’s head of government bond strategies, Tim Hext.

April’s inflation numbers – released yesterday – show a 3.6% increase in the annual Consumer Price Index. That’s slightly higher than March (3.5%) and more than the 3.4% markets were hoping for.

A rise in goods prices – mainly furniture, footwear and clothing – will not go unnoticed by the Reserve Bank and will require further investigation, says Tim.

But overall, the market is backing the RBA to do its job, he says. Implied 10-year inflation levels remain reasonably well anchored at 2.77%.

“Three-year yields in Australia moved back above 4 per cent after the data. We view this as a buying opportunity, since our medium-term view on inflation is positive.

“US inflation numbers come out on Friday and should show lower rental data feeding through to lower outcomes.

“Unless our concerns ramp up, we will be happy to be long duration into the winter months.”

TIM HEXT: Investors should position now for lower rates later this year

Tim Hext: An upgrade to the financial system’s plumbing

Private debt vs. public bonds: why it’s time to re-examine the traditional role of fixed income

Private credit has its place in portfolios.

So do bonds.

As rates normalise, investors would do well to remember those roles are different, writes Pendal head of income strategies Amy Xie Patrick.