The link between standup comedy and investing in this asset class

Past performance is not indicative of future performance, but assuming the RBA announces a rate cut after its Board meeting on 10 December 2024, as the market anticipates, three months prior to that date is 10 September.

Despite what the market is pricing in, Australian rate cuts do not appear to be imminent, which may keep long dated government bond yields steady – even as global counterparts pursue monetary easing cycles. There is no data to support a rate cut this year, with no indication locally of a sustained improvement in wages, services, or housing inflation – the primary factors driving high inflation. Additionally, business input cost inflation has reaccelerated, exerting upward pressure on consumer prices. Having said that, extending bond duration is prudent as a defensive measure, to benefit from falling government bond yields should economic conditions unexpectedly deteriorate.

Market optimism for substantial US rate cuts in 2024 appears excessive. The robust US economy negates the need for aggressive Fed rate cuts. Once this is realised, we could see a temporary rise in US government bond yields and potential short-term outperformance of Australian bonds.

In short, the market isn’t always right. In fact, it’s often wrong. It was only a month ago that global markets were panicking that the US was going into recession, which has now subsided. The RBA has also been known to backflip. In fact, the next rate move could be an increase. As noted in the minutes of the RBA’s last meeting, a rate hike was something they seriously considered before they ultimately decided to hold. Services inflation, wage inflation, and housing prices continue to be persistently elevated, with no clear short-term solution. There is also still a chance that goods inflation may pick up again due to geopolitical conflicts.

Nonetheless - timing is key. Standup comedians can control their performance and influence their audience, which enables them to deliver their punchlines at just the right moment. Investors don’t have that kind of power, but they can potentially play the yield curve more effectively with deeper understanding of the macroeconomic landscape and access to government bonds that target particular points of the yield curve. The latest VanEck Portfolio Compass: Credit and Fixed Income 2024 can help with the former, providing an analysis of the current and expected impact of inflation, policy rates, economic growth, and exogenous risks on Australian and global bonds markets.

Fixed income ETFs offer investors a means to express their views on interest rates. VanEck offers three Australian government bond ETFs that target distinct maturity buckets. 

1GOV - Targeted access to the short-end of the curve. Access to a portfolio of Australian government bonds which have maturity dates between 1 and 5 years.
5GOV - Targeted access to the mid-end of the curve. Access to a portfolio of Australian government bonds which have maturity dates between 5 and 10 years.
XGOV - Targeted access to the long-end of the curve. Access to a portfolio of Australian government bonds which have maturity dates between 10 and 20 years.

The VanEck Australian Floating Rate ETF (ASX: FLOT) is also available for investors who think the RBA’s next rate movement will either be a prolonged hold or an increase. As returns are based on short-term interest rates that are reset periodically, there is reduced duration risk compared to fixed rate bonds. These bonds are of investment grade quality, typically issued by corporate entities such as the big four banks, foreign banks, other lending institutions and listed property trusts. As this is deemed an elevated risk compared to government bonds, the yields are typically higher.