As all investors know, it is important to only invite the right assets across the threshold into your portfolio.
To illustrate what this means in practice for bonds, we will look at a 12-month period from 30 September 2016 to 29 September 2017.
Although the RBA remained on hold at 1.50%:
- The yield on the 3-year government bond increased 63 bps from 1.52% to 2.15%
- The 10-year government bond moved 93 bps higher from 1.91% to 2.84%.
Chart 1: Yield to Maturity of 3 Year and 10 Year Australian Government Bonds
Source: XTB & Bloomberg
Comparing separate parts of the Index sees surprising results
The Bloomberg AusBond Composite 10+ Index contains mainly government bonds with maturities 10 years and longer. This Index had a ‘frightening’ annual return of -5.62%. This result fulfils the predictions that bonds in a rising rate environment are scary.
But if we shift our focus to the Credit Index (corporate bonds) with maturities 0-5 years, we see a different picture. The total return for the Credit Index was 2.81% pa.
This just goes to show you need to let the right bonds into your portfolio.
The table below shows the Bloomberg Composite Index vs Credit Index for various maturities.
Table 1: Total Return of Bloomberg Indices – 12 months as at 29 Sep ’17
|Composite Bond Index||All Maturities||-0.75%|
|Credit Index||All Maturities||2.09%|
|Composite Bond Index||0-5 Years||1.31%|
|Credit Index||0-5 Years||2.81%|
|Composite Bond Index||10+ Years||-5.62%|
|Credit Index||10+ Years||0.39%|
Read more on the sydnicated tap of the March 2047 benchmark bond.