Investment in bonds fires up as fixed interest gets popular again

Unloved for decades and under fire last year, this asset class is now attracting billions of dollars from investors.

Investors are flooding into “boring” bonds ahead of a potential purple patch for fixed interest assets.

Two new reports show the strength of investors’ renewed fondness for fixed interest, less than a year after bonds suffered their worst performance in decades.

Australians are buying into bonds through fast-growing exchange traded funds, with new data from investment giant Vanguard and the Australian Securities Exchange showing fixed income ETFs attracted the most cash of any asset class in the first half of 2023.

Vanguard says net flows into fixed income ETF products totalled $2.5 billion in the first half of the year, more than twice as much as the $1 billion that flowed into equity ETF products.

Bond investors finally have something to cheer about. Picture: iStock

Australian bond ETFs attracted $1.74 billion, up 54 per cent on the same period in 2022, while international bond ETFs boomed – up 215 per cent to $763 million, it found.

Meanwhile, separate research by investment platform Stockspot found bond ETFs have grown strongly and now make up 12 per cent of Australia’s $150 billion ETF market.

The fixed interest sector includes corporate and government bonds in Australia and overseas, and apart from buying bonds through ETFs listed on the stock exchange, investors can also own them via managed funds, superannuation or direct investment for those with deep pockets.

Stockspot CEO Chris Brycki said fixed income assets suffered in 2022 as central banks around the world delivered large and fast interest rate rises from almost zero, creating capital losses in many bond funds.

But the reverse should apply if rates start falling soon, and investors already earning a higher income could see capital growth too.

“Bonds move inversely to interest rates – as interest rates go up, bonds fall,” Mr Brycki said.

“We’ve been researching the more than 250 ETFs on the ASX and Cboe Australia for 10 years now and this is the first time we’ve seen bond ETFs getting so much interest,” he said.

“Over the last 20 years interest rates have been so low that bonds haven’t seemed like an attractive investment. The share market has looked a lot more attractive with dividends and capital gains.

“Boring was probably the best way to describe them – a steady income but quite low.”

Vanguard head of investments Asia Pacific Duncan Burns said rising interest rates had helped improve long-term return expectations for bonds.

“While bond prices typically reprice lower when interest rates rise, investors with a sufficient long-term investment horizon will ultimately be better off,” he said.

Stockspot CEO Chris Brycki says bonds fall as interest rates rise, and vice versa.

“Investors are also flocking to bonds in their search for diversification and income as yields continue to stabilise - a signal that investors are becoming more optimistic, presenting an attractive alternative to holding cash which has generally underperformed bonds post rate hike cycles.”

Mr Brycki said while recessions were bad for shares they could be good for bonds as interest rates were cut to help economies, and that was a key reason for the resurgence.

“Now they have a juicy yield, and they will give you some protection if your share portfolio doesn’t do well,” he said.

Mr Brycki said ETFs were the fastest-growing vehicle for bond investments, although investors could also “buy them directly these days, but you need to buy quite big licks of them – maybe $25,000 or $100,000 – so it’s hard to get diversification”.

Originally published as Investment in bonds fires up as fixed interest gets popular again