With last week’s CPI figures showing inflation is cooling at a faster rate than expected, another RBA rate hike seems unlikely (but not impossible) at tomorrow’s meeting. The million dollar question is, where next for interest rates?
After 12 official cash rate hikes in 15 months, and with their full impact yet to be felt across the economy, it seems plausible that outgoing Governor Philip Lowe will once again keep rates steady for his final meeting.
As apprehension builds and scrutiny of economic data points intensifies, it’s no wonder that the ASX 200 continues to trade sideways, and well below the August 2021 highs.
Structural Headwinds
So while CPI might be starting to cool on the one hand, there are several structural macroeconomic headwinds which could prevent inflation from returning to the 2-3% target band.
From deglobalisation to demographics and global warming, the post-COVID world is a new paradigm and investors must consider how these factors might impact the global economy and financial markets.
From restructuring supply chains and ‘friend-shoring’, to ageing workforces and funding the green energy transition, these challenges are inherently disruptive and along with the lingering effects of recent fiscal and monetary stimulus, collectively inflationary.
As such, if inflation does persist, then rates will have to remain higher for longer, which in turn will likely dampen the outlook and demand for risk assets.
Less Risk, Greater Return?
While not without risk, corporate bonds can provide a superior rate of return to government bonds, and exhibit far less volatility than equity markets.
Currently, fixed-rate coupons on some corporate bonds and bond linked securities are paying 6-8% per annum, meaning you can receive an attractive return on your investment and a positive return over the adjusted monthly CPI (at current levels of 5.9%).
What’s more, if corporate earnings come under pressure, as has been forecasted by many brokers, dividends may need to be cut and/or shareholdings diluted in the event of an equity raise.
When investing directly in corporate bonds, investors don’t need to worry about whether they will receive regular income as the issuer has a legal obligation to pay the regular coupons, in addition to returning the face value of the bond at maturity.
Of course, if corporate earnings come under extreme pressure and the company defaults, investment capital can be at risk, and in some cases, a company may default on its obligations under the debt security even if the company itself doesn’t go into liquidation.
How the Australian Bond Exchange Can Help
Corporate bonds can play a pivotal role within a well-balanced portfolio but like all investments, the selection process requires extensive due diligence.
The Australian Bond Exchange (ABE) does not provide personal advice, but we can provide details to you about the features of the corporate bonds that we sell. We can also work with your financial adviser who can provide you with the personal advice that you require.
If you have any questions, please reach out to an adviser today.
Data as accurate as 04.09.2023
Disclaimer: Australian Bond Exchange Pty Ltd ACN 605 038 935 AFSL 484453 (ABE). This article is intended to provide general information of an educational nature only. It does not constitute the provision of personal advice and does not take into account your personal objectives, financial situation or needs. Before investing with ABE, you should consider the appropriateness of the investment to your particular financial and taxation situation and consider obtaining independent advice before making an investment. Examples in this article are for illustration purposes only and are not a recommendation to buy, sell or hold a particular investment. ABE makes no representation or guarantee as to the availability of a bond with the characteristics described in this article or that an investment made by you will generate the returns in the illustration. Past performance is not an indication of future performance. Investing with ABE is subject to our Client Services and Custody Agreement Terms and Conditions and Financial Services Guide.