Fixed interest and bonds in these uncertain times

Robert Camilleri Head of Structered Credit at Realm Investment House joins Rachael Ooi to discuss the current bond market and the future outlook.

Video transcript

Fixed income securities are a complex investment. While most of us think of the fixed interest world as simply government bonds, term deposits, and annuities, it's actually a very complex landscape. It's important to understand how factors like inflation, reserve rates, and unemployment can affect the pricing of these assets. My name is Rachel Ooi from Your Wealth Consultants. Today, I have the privilege of speaking with Rob Camilleri, Head of Structured Credit at Realm Investment House and a leader in the fixed interest investment space. Current fixed interest assets have faced significant challenges in this volatile market. Rob notes that, for the most part, bond rates tend to increase prior to interest rates. Therefore, it seems that the impact of rising rates and inflation has largely already been priced into the market. Let’s get Rob’s insights on the current fixed interest and bond market. Rob, thank you for joining me today. It’s great to have your expertise and to give my clients a clearer understanding of what’s happening in your space. Inflation is high globally, reaching levels we haven't seen since the 1970s. How have the Australian and global bond markets reacted? Thanks, Rachel. It’s a good question. If we look back to mid to late last year, we began seeing signs of inflation across global economies. The major debate was whether it was transitory or here to stay. You’ve probably heard about supply chain issues, which initially made the market think inflation would be short-lived. But as we entered 2022, it became clear that inflation was more persistent than expected. Central banks, especially the U.S. Federal Reserve, have made it clear they're raising rates to tackle inflation. Historically, when inflation in the U.S. rises above 5%, it’s often followed by a recession. So raising interest rates is a common response to slow the economy. Globally, we’re seeing a synchronized response—Reserve Banks in Australia, New Zealand, and the UK are all raising rates. Bonds have repriced to reflect the higher inflation outlook, which naturally affects areas like credit spreads and bank funding. And how has Australia, specifically, responded? The RBA was one of the last to act, initially waiting for wage growth as confirmation. But pressures from abroad and events like the war in Ukraine forced them to act quicker than anticipated. Markets had priced rates to reach between 1.5% and 2%. The debate now is how quickly we get there. What’s Realm’s current view on the fixed interest and bonds market? We're focusing on when the market believes we're at a peak rate cycle. Bond markets usually reprice ahead of actual interest rate moves. We're already seeing significant repricing in U.S. and Australian government bond rates—similar to the 1994 bond market sell-off. That event caused large negative returns for bond funds with significant term risk. We're seeing a lot of market volatility, and it's likely that some funds will see lower returns. But as bond markets plateau and expectations stabilize, we believe many rate hikes are now priced in. So, what’s your outlook for the next 12 months in Australia? Uncertainty is high, which tends to dampen spending. With rising interest rates, cash rates could be between 1.25% and 1.5% by Christmas. The RBA is aiming to ensure inflation doesn’t get out of hand. While wage growth hasn’t been particularly strong, a little inflation is actually positive. Everyone’s watching the housing market. Rising rates typically lead to a housing recession. But we’re starting from a very strong housing base. There's a lot of household savings and large balances in offset accounts. Unemployment is also at record lows, which reduces the risk of widespread defaults. What role does housing supply play in this?

It’s a critical issue. We simply don’t build enough houses. The government is introducing policies to support social housing and first-home buyers, like allowing superannuation access. Once people get into the housing market, they tend to manage well—Australia underwrites mortgages quite conservatively. As migration picks up, demand for housing will increase, which supports prices. If there is stress, there will likely be enough buyers to prevent a steep downturn. Realm has performed very well through this recent volatility, especially compared to your peers. What have you done differently? We take a diversified approach—we’re not limited to one part of the bond market. We invest in government bonds, bank debt, corporate debt, and securitized assets, both domestically and offshore. This broad reach allows us to identify relative value across 20+ markets. When markets get expensive, we’re happy to hold more cash and wait. This might reduce returns temporarily, but it gives us the ability to buy undervalued assets when markets reprice—like now. That’s typically when we achieve our best returns. So, would you say it’s a good time to invest in fixed interest?

Yes, especially in times of volatility, if you take an informed view. If you believe bond yields have peaked, then it’s a good time to take on term risk. But the safer option is to look at floating rate funds or those with short-dated assets. These offer good returns without the risk of losses from further repricing. Perfect. Thank you so much, Rob, for your time and insights. This is a complex area, and it's invaluable for investors to hear from someone with your expertise. Thank you, Rachel. It’s been a pleasure.