Schroders’ Kellie Wood says inflation, growth and fiscal risks will drive fixed income markets over coming months.
Investors should prepare for a more selective fixed income market over the coming quarter, as economic data increasingly takes precedence over central bank guidance and divergence between economies creates new opportunities, according to Schroders head of fixed income, Kellie Wood.
Wood says investors should be less focused on trying to predict the next global rate move and instead look for markets where the economic and policy outlooks are diverging.
“The next quarter is going to be about the data, not what central banks say they are going to do,” said Wood.
“For investors, that means being more selective about where they take duration and credit risk, rather than assuming all bond markets will move in the same direction.”
Wood believes Australian fixed income is well placed as softer inflation gives the RBA greater scope to move towards lower rates, while the US still faces a more uncertain inflation outlook.
“We continue to see a strong case for Australian bonds relative to US Treasuries. For investors, the opportunity is not simply that Australian rates could fall, but that the separation between Australia and the US creates an attractive relative-value opportunity.”
With credit spreads already tight, Wood says investors should focus on the income available from high-quality credit rather than relying on further spread compression to drive returns.
“Credit continues to offer investors attractive income, but we think security selection will become increasingly important.
“We favour high-quality Australian corporate and bank credit, where strong balance sheets and demand provide a solid foundation for returns.”
Wood says the changing market environment means investors need to think beyond whether central banks are cutting or holding rates.
“Investors have spent a long time focusing on the next central bank decision. The more important question now is where the economic data is taking us,” Wood said.
“That creates opportunities for investors who are prepared to look across markets, sectors and the yield curve rather than simply making a broad call on bonds.”
