Rising bond yields
About the author:
- Author name:
- By Nathan Lead
- Job title:
- Senior Analyst
- Date posted:
- 14 May 2015, 3:40 PM
- Sectors Covered:
- Infrastructure, Utilities, Banks
Commonwealth Government Bond (CGB) yields have risen sharply
over the last month. As a result, there is concern that bond-like equities
(infrastructure is typically included in this category) may be
negatively impacted.
We note that big cap infrastructure stocks APA
Group (APA), Sydney Airport (SYD), and Transurban (TCL) have
performed solidly over the last five years during periods of rising and
falling bond rates.
This indicates that while movements in CGB yields
are an important consideration, company, industry, and global factors
have a considerable impact on the investment performance of stocks in
the sector.
A sharp uptick in bond yields
We believe there has been a fundamental shift underway, whereby investors are
selling fixed rate bonds and reinvesting into inflation-protected bond funds.
This is occurring because there is a market fear of renewed inflation instead of
deflation as a result of higher energy prices.
The higher inflation outlook has
increased market expectations that the US Fed Reserve and other central banks
will raise rates earlier than previously expected. Greece also continues to be a
cause for concern.
We view an increase in inflation as a positive for the
infrastructure sector, because revenues typically benefit as a result of
inflation-linked pricing.
Strong returns during rising and falling bond yields
While past performance is not a predictor of future returns, it is worth noting
the strong absolute returns from APA, SYD, and TCL during periods of rising
and falling CGB yields over the last five years.
The stocks underperformed the
industrials index across July 2012 to Dec 2013, but produced solid absolute returns.
More information
Morgans clients can access further detailed analysis on APA Group, Sydney Airport and Transurban and other infrastructure stocks. If you are interested in finding out more, please contact your nearest Morgans office.
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