Bonds looking better as shares sink sharply, but clouds remain

However, after a below-average 2024 and 2023 and a horrific 2022, the recent performance of traditional bond investments does not instil much investor confidence.

Fortunately investors have more options than ever before with the rapid increase of new products in the interest and income space including listed investment companies, private credit and other alternatives.

AMP says returns from bonds last year were outshone by share markets as Aussie shares rose 11 per cent and global shares 21 per cent, and even cash in the bank delivered 4.5 per cent – better than bonds.

Investment returns from Aussie bonds and global bonds were 2.9 and 2.2 per cent respectively, down from 5.3 per cent each the previous year, it says.

“Bonds didn’t do as well as expected,” said AMP chief economist and head of investment strategy Shane Oliver.

 

He has forecast 4 per cent returns this year from both of them, not brilliant but – if the current share market slump worsens – potentially a better result than equities.

However, if Donald Trump’s tariff attacks turned into a trade war that lifted inflation globally, returns could be lower, he warned.

“It’s still early days, and we need to see worries about Trump settle down,” Dr Oliver said.

“There’s worries that the trade war will cause inflation in the US, and a rise in rates on bond yields is bad news for bond investors because it reduces the value of the bond,” he said.

“Uncertainty and volatility is normal, and last year was relatively calm. It’s going to be a tougher year this year than what we saw last year.”

Irene Goh, deputy global head of multi-asset at fund manager abrdn, said investors should diversify their income sources.

She said abrdn remained positive about bonds. “We also believe that investors should diversify risk through listed alternatives such as listed infrastructure companies as the returns from cash investments fall as central banks cut interest rates,” she said.

“In an environment where inflation could reignite given Trump’s tariffs and interest rates could fall further on savings accounts in 2025, investors should be cautious about investing too much in cash and instead diversify their exposures into other assets such as equities, bonds and alternatives which can deliver reliable income,” said Ms Goh.

Private credit manager MA Financial’s head of credit investments and lending, Frank Danieli, said Australian investors now had several ways to access credit-related investments.