With valuations having outpaced fundamentals within equity markets both locally and offshore - after recently hitting new highs - investors may wish to revisit the merits of low-risk fixed income as a boring, yet safe counterpoint to riskier assets, notably shares.
In the United States, JP Morgan has cut second quarter consensus earnings forecasts from 11% year-on-year at the start of 2025 to 3.5% year-on-year today, leaving second quarter consensus forecasts outright lower than what was delivered in the first quarter.
Closer to home, the ASX earnings season – which officially kicks off early in August - is also expected to be a much more muted affair.
Despite the ASX 200 trading at near record levels, FY25 is looking down the barrel of a 1.4% fall in total earnings for the index, which would mark the third straight year profits have gone backwards.
Does fixed income look more compelling?
Given the sheer weighting of the Commonwealth Bank of Australia (ASX: CBA) on the ASX’s main board – any unravelling of its current extreme over-valuation – with forecast price to earnings (PE) over 31 times equivalent to an earnings yield of just over 3% per annum – the main index looks primed to struggle.
Meanwhile, with the entire market also looking toppy on the valuations front, more investors may wish to nestle in the safe bosom of fixed income which – for now – appears to be more realistically priced.
Given where interest rates are at, the three key risks facing income investors – duration, credit and diversification – appear to be positioned just right.
In a falling interest rate environment, the duration is good: as rates fall, the capital value of bonds rises.
If you’re new to the bond game, duration simply indicates how much the price of a bond is likely to fluctuate when interest rates change.
While investors clearly want a reasonable yield from the fixed income portion of their overall investment portfolio, what they also want from this asset class is to minimise capital loss, which is where flexibility around duration risks and diversification can help.
NAB’s latest bond offering
Income investors looking for alternatives to the typically high-yielding dividends from the big-four banks may wish to look at current bond offerings.
Last week National Australia Bank (ASX: NAB) priced a 10-year non-call subordinated bond at a yield of 5.8% which marks a 2.6% premium over CBA’s earnings yield.
This is the largest premium for major bank Tier 2 subordinated debt over CBA’s earnings yield on record.
Prior to COVID, Tier 2 was priced at a 2% to 3% lower yield than the earnings yield of the banks.
By comparison, between 2021 and 2024, Tier 2 was priced zero to 2% above CBA’s earnings yield.
The credit spread on the NAB issue was 1.7% per annum over the asset swap rate.
Since the liberation day volatility in early April, spreads have tightened but remain wider than the levels of early February and much wider than the levels of 2021.
While they may appear expensive relative to historical levels, they're by no means expensive relative to equity prices.
Given that it's rare for fixed income to potentially outperform equities, investors should sit up and take note.
Admittedly, fixed income might not be cheap, but in a world where everything feels expensive, it looks like a pretty great place to hide.
Other bond offerings
Meanwhile, two other bond issuances that have caught Azzet’s eye this week include:
- Dyno Nobel Limited: (BBB/Baa2) launched a 7.25-year and a 10-year fixed senior unsecured transaction. Indications of interest (IOIs) are in excess of $2.8bn (7.25-yr: $1.1bn, 10-yr: $1.7bn). Initial price guarantee (IPG) for the 7.25-yr is currently Semi-annual quarterly Asset (SQ ASW) +170bps area (5.55% coupon equivalent) and the 10-yr is SQ ASW +190bps area (6.031% coupon equivalent).
- Suncorp Bank (Norfina): (AA-/Aa2/AA-) priced a $1.75bn 3-year senior unsecured transaction across two tranches: a $200mn FXD and a $1.55bn floating rate note (FRN) at 3m bank bill swap rate (BBSW) / SQ ASW +73bps (4.00% coupon equivalent).
The final orderbook size was in excess of $2.9bn (FXD: $330mn, FRN: $2.57bn) and initial price guidance (IPG) was 3mBBSW / SQ ASW +80bps area.
New FI offerings
Meanwhile, investors may also want to check out two new fixed income offerings from Bennelong and Blossom.
Bennelong Funds Management has launched the Allspring Global Income Fund, a new investment offering aimed at retail, wholesale, and institutional investors across Australia.
The launch follows Bennelong’s strategic partnership with Allspring Global Investments, announced in May, to distribute Allspring’s global income strategy throughout Australia and NZ.
Allspring, a prominent global asset manager with over US$600 billion in assets under management and advisement, brings deep expertise in fixed income, managing more than US$460 billion in this asset class.
The new fund leverages Allspring’s dynamic global income strategy, investing across a broad spectrum of fixed income sectors including government bonds, securitised assets, investment-grade and high-yield credit, and emerging market debt.
The fund aims to outperform the Bloomberg Global Aggregate Index, offering daily liquidity and a total return through monthly income and capital growth.
John Burke, CEO of Bennelong, described the fund as a “core component of well-diversified portfolios,” citing Allspring’s decade-long track record of strong risk-adjusted returns.
Chair Gillian Larkins highlighted the move as part of Bennelong’s evolution beyond equities.
Andy Sowerby of Allspring added that the fund’s flexible, multi-sector approach is well-suited to navigating ongoing market volatility.
Blossom for Kids
Meanwhile, micro-investing app Blossom has launched its new feature Blossom for Kids enabling adults to open accounts for under-18 family members or loved ones.
Blossom has lifted its funds under management by more than a fifth since the start of the year to $122 million.
The new feature sits alongside existing tailored offerings including accounts for businesses, self-managed super funds and couples.
Blossom for Kids is being framed as an exciting alternative to traditional cash and equity products.
It gives young savers direct access to a professionally managed bond fund via either the Blossom Save or Blossom Plus products, which target returns of 5.45% p.a. and 6.50% p.a. respectively.
While bonds have for a long time played a role in building and protecting wealth, Blossom co-founder Gaby Rosenberg reminded investors that up until now they’ve often been out of reach for everyday families.
“With Blossom for Kids, we’re removing barriers by offering access with minimum investments as low as $5, all through an intuitive digital platform,” he said.
“Parents can easily establish accounts and track progress alongside their children, turning financial literacy into a hands-on experience.”
This article does not constitute financial or product advice. You should consider independent advice before making financial decisions.
