Much has been written about the stance of central banks throughout the global pandemic. Rates were kept at or near zero in most western economies through the pandemic, creating high incentives to borrow money for housing, and a real conundrum for investors and retirees.
The usual defensive qualities of capital stable income assets such as bonds did not “save the day” for investors (Figure 1). This made 2022 one of only two years in the last 50 that both equities and bonds fell in price and 2022 was clearly the worst on record.
Figure 1: AusBond Composite Bond Index vs ASX200 Returns over 30 years.
Now is the time where the bond market offers almost decade-high best entry levels
Central banks were made to pay for the extended folly of their accommodative policies, as investors in risk assets (property and shares) lost confidence in 2022, causing an “outlier” year where these assets lost value due to rampant inflation. As displayed below, strong bounce in equity market during calendar 2023 has seen share dividend yields fall further below corporate bond yields. High grade fixed rate bonds now offer the best relative advantage versus shares in nine years (see Figure 2).
Figure 2: AusBond Composite Bond Index vs ASX200 Equity Yields over 10 years
These types of bonds, as exemplified by June’s BBB rated WBC callable 2028 6.491% yield, give investors three things:
- Capital stability for a fixed term, often around five years
- Predictable, consistent income that far exceeds term deposit rates*
- Defensive characteristics that mean these investments mostly perform well when risk-assets like shares and property suffer.
Figure 3 : CBA dividend yield and BBB Corporate bond yield
To conclude, investing in high grade corporate bonds in mid-2023 is offering investors decade high returns for minimal risk.
