Who’s afraid of duration? The role of fixed income · Australian Household Debt Service Metric...
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Who’s afraid of duration? The role of fixed income May, 2019
Transcript of Who’s afraid of duration? The role of fixed income · Australian Household Debt Service Metric...
Who’s afraidof duration?The role offixed income
May, 2019
Introducing Chris RandsPortfolio Manager, Fixed Income
Chris joined the business in 2011 as a credit analyst. Today he is responsible for portfolio management, including portfolio construction and trading, for the Australian multi-sector portfolios, and macroeconomic research — assisting the fixed income team with strategic direction and formulating the macroeconomic viewpoints for portfolio positioning.
Prior to joining Nikko AM, Chris worked as an associate analyst at Moody’s Investors Service. Chris has 9 years’ experience in fixed income markets and holds a BCommerce (Economics & Finance) and M.App Fin.
Section 1The market view
The market viewDeath of a bull market
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Australian 10-year bond yield
Confidential – Not For Redistribution. This material must be read in conjunction with the ‘Important Information’ statement on the last page
Source: Bloomberg
The market viewBut who defines normal?
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US 10-year bond yield since 1900
US 10 Year Yield 2% - 5%
Confidential – Not For Redistribution. This material must be read in conjunction with the ‘Important Information’ statement on the last page
Source: Bloomberg, A history of Interest Rates, Measuring Wealth
Great Depression
Each generation tends to consider as normal the range of interest rateswith which it grew up; rates much higher suggest a crisis or seem extortionate, while rates much lower seem artificial or inadequate.
—A History of Interest Rates (2005)
The market viewBut who defines normal?
Confidential – Not For Redistribution. This material must be read in conjunction with the ‘Important Information’ statement on the last page
The market viewBaby boomers…
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US 10-year bond yield since 1900
US 10 Year Yield
Confidential – Not For Redistribution. This material must be read in conjunction with the ‘Important Information’ statement on the last page
Source: Bloomberg, A history of Interest Rates, Measuring Wealth
Baby Boomers are born:1946 – 1964
Baby Boomers start work:1966 – 1984
Section 2A numbersgame
A numbers gameAustralian household debt
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Australian Household Debt Service Metric
Household Debt Service Metric Debt to GDPDebt Service if Rates +1.5% (LHS)
Confidential – Not For Redistribution. This material must be read in conjunction with the ‘Important Information’ statement on the last page
Source: Bank of International Settlements, Reserve Bank of Australia, Nikko AM
A numbers gameAustralian households – A new regime?
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Debt to GDP
Household Debt to GDP & 10 Year Bond Yield
Confidential – Not For Redistribution. This material must be read in conjunction with the ‘Important Information’ statement on the last page
Source: Bank of International Settlements, Bloomberg
We are here
A numbers gameDemographic shift
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Working Age Population Growth - Major Developed Economies
United States Japan Germany, UK, France, Italy, Canada & Australia Total
Confidential – Not For Redistribution. This material must be read in conjunction with the ‘Important Information’ statement on the last page
Source: United Nations Population Division
A numbers gameDemographics and inflation
Australia
United States
Canada
United Kingdoms
Germany
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Japan
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Working age population growth & inflation since 2011
Confidential – Not For Redistribution. This material must be read in conjunction with the ‘Important Information’ statement on the last page
Source: United Nations Population Division
Section 3Lower forlonger
Lower for longerThe most likely outcome
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US 10 Year Yield 2% - 5%
Confidential – Not For Redistribution. This material must be read in conjunction with the ‘Important Information’ statement on the last page
Source: Bloomberg, A History of Interest Rates, Measuring Wealth
Section 4Fixed ratebonds
Fixed rate bondsHigher returns
Confidential – Not For Redistribution. This material must be read in conjunction with the ‘Important Information’ statement on the last page
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Cumulative returns since 2000
AusBond Composite (Fixed Rate) AusBond Floating Rate Credit
Source: Bloomberg, Nikko AM. Past performance is not an indicator of future performance
Mid 2000s was a rising rate environment, but fixed rates didn’t substantially underperform.
Fixed rate bondsNegative correlation
Confidential – Not For Redistribution. This material must be read in conjunction with the ‘Important Information’ statement on the last page
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Rolling 1 Year Correlation - Bonds and Equities
Equity Market Correction greater than 5% AusBond Composite Floating Rate Credit
Source: Bloomberg, Nikko AM
1YR Bond Return = Yield + (Duration x Change in Yield)
When looking at fixed income as a defensive asset, we should consider:
1 How far can interest rates fall?2 How much duration does this imply I hold?3 What is the cash rate view?
Fixed rate bondsA simple model for duration
Confidential – Not For Redistribution. This material must be read in conjunction with the ‘Important Information’ statement on the last page
Fixed rate bondsWhat diversification can we expect?
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AusBond Composite - Duration
Confidential – Not For Redistribution. This material must be read in conjunction with the ‘Important Information’ statement on the last page
Source: Bloomberg
How much duration do I have?
Fixed rate bondsWhat diversification can we expect?
Confidential – Not For Redistribution. This material must be read in conjunction with the ‘Important Information’ statement on the last page
If we assumed bonds rallied 150 basis points in a large equity sell off, the estimated return is:
1YR Bond Return = Yield + (Duration x Change in Yield)
= 2% + (5.35 x 1.50%)= 10%
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AusBond Composite - Yield to Maturity
AusBond Yield RBA Cash Rate
Source: Bloomberg
How far can rates fall?
Section 5Strength innumbers
Strength in numbersHow we performed
Confidential – Not For Redistribution. This material must be read in conjunction with the ‘Important Information’ statement on the last page
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Australian cash rates
1 Year Term Deposit Rate RBA Cash Rate
Source: Bloomberg, Reserve Bank of Australia, Nikko AM. *Assumed return based off rolling a 1 year Term Deposit using the RBA’s Retail Deposit Rates. Nikko AM Australian Bond Fund distribution return equals Total Fund Return
minus Fund growth return. Fund net returns are post fees, pre tax using redemption prices and assume reinvestment of distributions. Past performance is not an indicator of future performance. As at 31 March 2019
0.00%
1.00%
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3 Year 5 Year
Fixed Income - Net Returns
Nikko AM Aus Bond Fund AusBond Composite
Typical Passive Aus Bond Fund Rolling 1 Year Term Deposit*
Rates reach all time lows
This material was prepared and issued by Nikko Asset Management Australia Limited ABN 34 002 542 038, AFSL 229664 (Nikko AM Australia)who is the responsible entity and issuer of units in the Nikko AM Australian Bond Fund ARSN 098 736 255 (Fund). Nikko AM Australia is part ofthe Nikko AM Group. The information contained in this material is of a general nature only and is not personal advice. It is for the use ofresearchers, licensed financial advisers and their authorised representatives. It does not take into account the objectives, financial situation orneeds of any individual. Investors should consult a financial adviser as well as the information contained in the current Fund’s Product DisclosureStatement (PDS) which is available at www.nikkoam.com.au/pds before deciding to invest in the Fund. Applications will only be accepted if madeon a current application form. An investment in the Fund is not a bank deposit and distributions and the return of capital are not guaranteed.Past performance is not an indicator of future performance. Any references to particular securities or sectors are for illustrative purposes onlyand are as at the date of publication of this material. Whilst we believe the information contained in this material to be correct as at the date ofpresentation, no warranty of accuracy or reliability is given and no responsibility is accepted for errors or omissions. Figures, charts, opinions andother data, including statistics, in this material are current as at the date of publication, unless stated otherwise. This is not a recommendation inrelation to any named securities or sectors and no warranty or guarantee is provided that the positions will remain within the portfolio of theFund. Any economic or market forecasts are not guaranteed.
Important information
