Despite rapid surges in interest rates to combat inflation, many economies are still running hot with very low unemployment and positive GDP growth. Despite 11 interest rate hikes, the U.S. economy continues to be the strongest performer out of the G7, as measured by GDP growth since pre-pandemic levels.
Growth increased by 2.4% in the second quarter and unemployment sits just above 50-year lows at 3.8% in August. Consumer spending has also been strong with retail sales up 0.7% Month on Month in July, marking a fourth consecutive rise.
Elsewhere, the UK has endured 14 rate hikes yet figures released from the Office of National Statistics (ONS) reveal that in July, approximately two thirds of goods and services categories were still rising in price at an annual rate of more than 5%.
While inflation did drop from 7.9% in June to 6.8% in July, the Bank of England is anticipating an increase in the August figures, due to be released on September 20th.
In Europe, while the EU recently downgraded its growth forecasts, expecting growth of just 0.8% for 2023, it also expects inflation to remain elevated above levels previously forecast.
In Australia, the RBA has raised the official cash rate 12 times, yet unemployment also remains very low by historical standards at 3.6%, with the participation rate up at 66.8%.
While the CPI indicator excluding volatile items and travel, came in lower than expected, at 5.8% in the 12 months to the end of July 2023, certain inputs like electricity and fuel continue to be cause for concern. In July, electricity prices surged 6%, increasing annual inflation for this item alone to 15.7%.
Despite the uncertainty, the Australian economy still expanded by 0.4% in the second quarter, beating expectations of a 0.3% increase and was higher than the 0.2% increase in the previous quarter.
What does it all mean for investors?
As government and central banks grapple with varying levels of persistent inflation, the prospect of interest rates staying higher for longer seems increasingly plausible.
If such a scenario materialises, then it fundamentally changes the calculus for portfolio construction, given higher interest rates will most likely keep a lid on growth asset valuations. This isn’t to say that equities don’t have a place within investment portfolios, but higher interest rates have undeniably reinvigorated the fixed-income asset class.
While long-dated Australian government bonds are yielding circa 4.1%pa, some corporate bonds and other fixed-income securities are yielding upwards of 8%pa.
Corporate Fixed-Income Securities – What Are They?
Corporate fixed-income securities including bonds are issued by organisations who are looking to raise capital.
For example, a company could issue a $100 million debt issuance via a bond which could be purchased by investors who are effectively lending money to the company. To compensate investors, the company will generally pay an agreed rate of return for the entire period of time (typically called the ‘term’) of the bond. At the end of the term, also called ‘maturity’, the company will return the face value of the bond to you assuming no credit event (for example a default or bankruptcy) has taken place.
It’s important to note that there is a wide universe of corporate fixed-income securities with varying degrees of risk. This is the reason why the potential returns on corporate fixed-income investments are higher than government bonds.
Speak to a Specialist
If you are interested in learning more about how corporate fixed-income securities work and how they can be generally used within investment portfolios to complement other asset classes, contact an adviser at the Australian Bond Exchange today.
Disclaimer: Australian Bond Exchange Pty Ltd ACN 605 038 935 AFSL 484453 (ABE). This article is intended to provide general information of an educational nature only. It does not constitute the provision of personal advice and does not take into account your personal objectives, financial situation or needs. Before investing with ABE, you should consider the appropriateness of the investment to your particular financial and taxation situation and consider obtaining independent advice before making an investment. Examples in this article are for illustration purposes only and are not a recommendation to buy, sell or hold a particular investment. ABE makes no representation or guarantee as to the availability of a bond with the characteristics described in this article or that an investment made by you will generate the returns in the illustration. Past performance is not an indication of future performance. Investing with ABE is subject to our Client Services and Custody Agreement Terms and Conditions and Financial Services Guide.