High-quality bonds benefitted from being viewed as a ‘safe-haven’ asset during the Covid-19 uncertainty, and strong demand saw interest rates on long-term bonds (‘bond yields’) pushed down to historic lows – thanks partly to central banks buying huge amounts of them as part of their stimulus efforts. This, in turn, led to solid revaluation gains on the bonds in our funds, helping to support returns just when investors needed it most. Since then, bond yields have risen as economic data rebounds and with the rollout of vaccinations around the world.
Although long-term bond yields have recently gone up, they have simply gone back to where they were at the start of last year (pre-Covid). Importantly, central banks worldwide continue to hold their official short-term interest rates near zero to support the economic recovery. This should temper how much further longer-term interest rates might increase from here.
Adding to the mix, in February the Reserve Bank was asked to include house price sustainability (and therefore house prices) more specifically in setting interest rates. While the Reserve Bank already considers house prices from a wider financial stability standpoint, the change puts more pressure on them to not ‘stoke the fire’ of the housing market any further.
Our funds’ allocation to bonds acted as an important ‘shock absorber’ during last year’s share market sell-off. However, with historically low yields, the challenge became how to adapt our fixed interest investments as the outlook evolves.
We have tackled this challenge in a few key ways:
Because most investment portfolios include both fixed interest investments and shares, the two normally work well together to capture growth while ‘smoothing the ride’ when markets receive an unexpected curveball. This requires careful, active management and is an important dynamic to keep.
This sits alongside the key direction within Booster funds of expanding investments directly into businesses and land that deliver a sustainable income, which also directly address the challenge from today’s interest rates.