A report by a respected financial services firm has highlighted the importance of properly investing in the Australian bond market.
Key points:The report by Credit Suisse shows the cost of high-quality, low-risk, low volatility Australian bonds has dropped by nearly 70 per cent since the start of the financial crisisSource: Credit Suisses report on the bond marketIn the most recent financial quarter, the Australian government’s bond fund returned $17.8bn to investors, which equates to an average return of 7.3 per cent.
The fund returned a total of $2.8 billion in 2016.
However, a study by Credit Spree shows that the cost to bond investors has fallen by nearly 80 per cent in the last four years, from $24.4bn to $18.3bn.
It said the cost has dropped substantially in the past four years due to a number of factors, including lower inflation, lower interest rates and a higher level of corporate and household debt.
It found the bond industry was a low risk asset class, with a relatively low rate of return and low volatility.
The report found that the average bond is now worth about $40 per bond.
This compares to the average return from a similar asset class of about $75 per bond in 2016, which was about 50 per cent higher than the fund’s average return.
Credit Suisse says bond returns have fallen in Australia because investors are spending more time investing in bond fundsSource:Credit Suisss report on bond marketsIn the past few years, the value of Australian bonds have increased by almost 50 per per cent, according to Credit Suisa.
However the fund says it is important to note that there is no evidence that higher interest rates or higher corporate and personal debt have affected the quality of bonds.
Mr Collins said the changes in bond markets were likely due to two factors: a decline in bond yields and the rise in the level of interest rates.
“As a result, the cost per bond has fallen dramatically, as a result of the rise of interest rate,” he said.
“The rise of inflation also means the cost-per-bond is falling, as investors are less concerned about inflation.”
Mr Collins also said there was no evidence to suggest the bond fund’s bond portfolio has suffered as a consequence of the economic crisis.
“We see no evidence of any deterioration of the fund over the last year or two, nor are there any signs of any structural problems that are affecting its ability to perform its role,” he added.
The latest figures show that the value per bond fell by about $1.3 billion in the first quarter of the year.
However it still returned about $22.6bn to the fund.
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