Rising interest rates and uncertainty about inflation have seen yield-hungry investors happily camped in short-dated fixed-income investments. Coolabah Capital's Chief Investment Officer, Christopher Joye, has been a vocal advocate of this trade. However, as we look out to 2025, Joye expects attractive entry points to emerge in longer-duration bonds.
In the immediate future, he says a straight-line path back to 2% inflation rates in Australia is a 'heroic' assumption.
"We would acknowledge that it is plausible and possible but it's heroic and we think it is going to be a much tougher multi-year battle," Joye argues.
Fiscal dominance, i.e., government spending, appears to be at odds with the RBA's ambitions of bringing inflation back to the target range of 2% to 3%.
"We're seeing enormous budget deficits locally and globally. So politicians are priming inflation at the same time as monetary policy is trying to compress inflation," he adds.
Joye draws on the Federal Reserve's long-term track record of delivering a 'soft landing' and notes that this feat has only been achieved once since World War II.
"I think it's sobering that with the Fed cutting by 50 basis points in September. We've already seen some surprising, for the market, batches of inflation, wages and jobs data," Joye says.
The US data was followed by strong employment data in Australia, where September figures revealed a robust jobs market, pushing out interest rate cut expectations.
Throughout 2024, Joye has advocated a small allocation to longer-duration bonds to take advantage of higher yields. However, this remains a tactical allocation based on the value he sees on offer.
"A month ago, they [long-duration bonds] were very unattractive. In fact, I exited, personally, all my fixed-rate exposures in our funds."
Joye says the fight against inflation is likely to extend over multiple years and encourages investors to stay liquid, up their capital structure, and be defensive.
Green shoots emerging after years of pain
Despite these views, Joye says green shoots of opportunity are starting to emerge after years of pain for long-duration bonds. While rates have been rising over the long term and are quite volatile, the trend of central bank easing is established, especially if you look offshore, where rates are being cut by the US, England, Canada, and New Zealand.
This has an impact on Australian fixed-income investors: after a period of looking very unattractive, Australian interest rates could start to present value on a global stage.
"We are on the cusp of seeing a scenario where interest rates in Australia could suddenly look quite attractive compared to the rest of the world. If those offshore central banks keep cutting, Aussie yields will look relatively quite attractive," Joye explains.
Turning to the US, betting markets are suggesting a Republican win in the critical US election. While Joye says he has no idea which way the vote will fall, he does have a strong view that a Trump win would mean higher inflation.
"If Trump wins, all the evidence suggests inflation will be much higher, and bond yields will be higher under Trump. So I think you're going to get some really attractive entry points to buy fixed-rate bonds and switch from floating," Joye says.
In this Fund in Focus, Joye shares his views on the opportunities across fixed-income markets. He also introduces two of Coolabah's Funds that give investors exposure to longer-duration global and domestic fixed-income markets.
Time codes
0:00 - Introduction
0:41 - Views on the Australian economy
3:41 - Opportunities in fixed income markets
6:35 - Introducing the Coolabah Active Composite Bond Fund (Hedge Fund)
10:31 - Views on the global economy
13:55 - Introducing the Coolabah Active Global Bond Fund (Hedge Fund)
16:07 - Hedging explained
16:41 - Further information
