Investors fly to the safety of bond markets as COVID crunches equities
Link copied to
Return of capital rather than return on capital is what investors are looking for right now and they’re turning, as they always do, to bond markets, says Morningstar analyst Chris Tate.
He says aggressive central bank actions combined with credit market fears have caused a “flight to safety” to high quality and, crucially, liquid securities, in other words, government bonds over corporate debt.
These are the investments that deliver low returns but little volatility, and can be cashed out quickly if need be.
“While equity market selloffs attract most of the media headlines, what could be easily forgotten is the vital role fixed income plays in an investment portfolio in times of extreme volatility,” Tate wrote in a note this morning.
“Fixed income, particularly those with high credit quality, provides diversification and reduced risk helping to stabilise investor portfolios against equity losses. During volatile periods, we would expect to see a negative correlation to equity returns, providing capital preservation and shelter from sharp share market falls.”
If government bonds and those tied to higher quality credit have been winners, those associated with inflation, currencies — as almost all are falling against the US dollar, and shorter periods of time have seen returns sink.
Australian bonds have held up well, Tate said, because the Australian credit market is perceived as being of a higher quality than those overseas.
Bonds are a generally poorly understood asset class, in Australia and overseas.
A bond is a fixed income instrument that represents a loan made by an investor to a borrower. The borrower could be a company or a government. The owner of the bond is paid an interest rate — a coupon or yield — over time. The more people want the bond, the lower the yield (and conversely, the higher the price).
For the average retail investor, bonds are not viable as they often are restricted to professional investors and have a heavy buy-in price.
There are a range of listed investment trusts (LITs) and bond ETFs on the ASX which allow retail investors to buy in.
The ETFs include iShares Core Composite Bond ETF (ASX:IAF), SPDR S&P/ASX Australian Bond Fund (ASX:BOND), and the Vanguard Australian Fixed Interest Index ETF (ASX:VAF).
The LITs available at the end of September 2019, are listed in the table below.