Piloting Defensive Portfolios During the Powell Pivot

Inflation and interest rate hikes are putting pressure on defensive portfolios. In this paper, we look at ways to help improve a portfolio’s resiliency.

  • Higher yields expected across government bond curves in 2022, may lead to underperformance of fixed rate bonds.
  • Duration risk of standard fixed income indices are much higher today and are likely to be poorly rewarded, as yields backup from ultra-low levels.
  • Credit likely to perform better in the medium term, as we are still in an expansionary phase of the credit cycle with strong corporate fundamentals and low distress.
  • Australian Floating Rate Notes (FRNs) can provide diversification and serve many purposes, positively contributing to a defensive fixed income allocation;
    • As a complement to cash – albeit with higher risk
    • Low duration domestic fixed income and/or 
    • A high quality credit exposure.