As interest rates in Australia head ever southwards, it is becoming increasingly difficult for interest rate investors to secure a satisfactory return on their money. This was brought into stark relief recently as the AOFM sold inflation-linked notes at a negative yield for the first time, $200m of 1 per cent indexed bonds due in November 2018 at an average yield of minus 0.076 per cent.
Investors might feel tempted to abandon fixed income altogether and put their money in an asset class with a more realistic prospect of a decent return, like equities or real estate.
Not that professional investors are having an easier time of it. The latest Bank of America Merrill Lynch fund manager survey showed that global fund managers say that both shares and bonds are overvalued at present. The survey also showed that global investors think the US dollar is also well overvalued, more so than at any time since May 2009. A net 84 per cent of the global managers think bonds are overvalued which represents an increase from a net 75 per cent in the corresponding survey in March.
Interest rate investors in Australia would have ever reason to be confused, which is why it might be time for a reminder that debt carries a lower risk than equity. Fortuitously, the recent case of Atlas Iron provides a perfect case study of the risk pyramid.