AMP Capital NZ is buying into local inflation-linked bonds as part of its portfolio protection strategy, the group’s managing director and head of fixed income, Grant Hassell, said last week.
Hassell said NZ inflation-linked government bonds look cheap relative to nominal bonds with investors “complacent” about inflation prospects.
He said based on current pricing NZ inflation would only have to average over 1.2 per cent for the ‘linkers’ to break even relative to the most recent nominal 10-year government bond yield of 3.25 per cent.
The government has issued about $12.5 billion of inflation-linked bonds since it began offering the product again in 2012 after a more than 15-year hiatus.
Based on current yields the market has priced in NZ inflation of about 1.25 per cent over the medium term, Hassell said, compared to the Reserve Bank of New Zealand’s (RBNZ) stated CPI target of 2 per cent.
The latest RBNZ figures put the NZ inflation rate at 0.4 per cent.
Hassell agreed with the consensus view that the Official Cash Rate (OCR) was likely to remain low over the next couple of years, putting pressure on investors to take on more risk.
For fixed income investors that meant “moving up the yield curve and taking on duration risk”.
“The risk is that if rates rise faster than expected bond investors could face capital losses,” he said. “How do investors cope with taking on more risk? Right now AMP is taking on some longer term risk but with protection.”
As well as the protection afforded by inflation-linked bonds, Hassell said AMP Capital was looking at opportunities in NZ credit markets.
He said while corporate bond spreads tend to be tighter in New Zealand than other developed markets – mainly due to retail investors paying too much for yield – the gap could widen over the next few years.
As more corporates come to market to take advantage of the low borrowing rates “NZ credit spreads should widen” to global levels, Hassell said.
Overall, AMP Capital was sanguine about global markets, he told media at the release of the group’s quarterly update.
“We expected a correction and we got one [over the September quarter],” Hassell said. “And with corrections, you get opportunities – which we are taking.”
The fund manager – New Zealand’s second-largest with just over $19 billion under management – was overweight global equities, commodities, cash and foreign currency, according to the quarterly update. At the same time, AMP Capital was underweight bonds (both NZ and global) while adopting a neutral stance on Australasian equities and listed property/infrastructure.