Haran Karunakaran

The Reserve Bank of Australia’s decision to raise interest rates this week to 4.85 per cent reinforces the case for long-term investors to look beyond cash and consider locking in attractive yields available in global fixed income markets, according to Capital Group.

Haran Karunakaran, Investment Director, Australia at Capital Group, said investors with a medium-to-long-term horizon risk missing opportunities by focusing too heavily on the timing of interest rate movements.

“The debate around fixed income is often framed too narrowly around when central banks will start cutting rates. But long-term investors don’t necessarily need rate cuts to benefit from bonds.

“If markets are pricing in multiple rate hikes, the bar is lower than that. Central banks just need to hike fewer times than anticipated for bond yields to fall, generating capital gains for investors. And along the way, investors can earn attractive levels of income.”

This has been the case for US bonds in recent weeks, with markets at points pricing nearly 4 rate hikes

Karunakaran said global bond markets were offering compelling opportunities, with several markets already priced for hawkish hiking cycles as well as offering attractive yields. Broad global credit for example yields approximately 7.5 per cent on an Australian dollar-hedged basis

“For long-term investors, the opportunity is to lock in attractive yields today rather than attempt to pick the turning point in monetary policy.

“For example, in the final quarter of 2023, global corporate bonds returned around 9.5 per cent as interest rate expectations shifted sharply. It was a powerful reminder of how quickly bond markets can reprice and how difficult it is to time duration exposure.”

Capital Group believes moderate duration of around four to six years offers an attractive balance between income generation and potential capital appreciation.

“This isn’t a call to maximise duration or make an aggressive bet on interest rate cuts. It’s about holding enough duration to benefit if bond yields decline, while earning attractive income if rates remain elevated.

“Fixed-rate corporate bonds are particularly interesting because they combine duration exposure with additional yield from credit spreads, providing an income buffer against interest rate volatility”, he said.

For investors with a medium-to-long-term horizon, remaining heavily allocated to cash or very short-dated credit carries its own risk.

“The opportunity is significant now, to secure attractive income for the years ahead and build a diversified fixed income portfolio capable of delivering returns across different interest rate environments.”

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