IAF
With interest rates most likely to increase, what is the outlook for IAF share price and returns? Is there a better safe option in these economic times? Thanks, Ros
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Answer
Hi Ros,
The IAF is a broad bond ETF that holds investment-grade government, semi-government and corporate bonds tracking the Bloomberg AusBond Composite Index. Bond prices move inversely to interest rates: when rates rise, existing bond prices fall to offer comparable yields to new issues. Because IAF holds bonds with a moderate duration (~4–6 years), its NAV and unit price can drop in a rising-rate environment — and this is a risk for capital value.
If rates keep rising, IAF’s unit price will soften (because bond prices fall), but its quarterly income helps total returns. It’s not ideal when the priority is capital preservation in a rising-rates phase, but it’s also important to note that markets/bonds have also priced in a high chance of the RBA hiking rates 1-2 times this year. The price is unlikely to be impacted further, if they raise rates inline with current market pricing, but it will be impacted if they move by more. On the flipside, if the RBA sits tight, and does not raise rates, the price will likely go up.
For a more defensive outcome, investors may consider short-duration bonds, floating-rate products or high-yield savings/term deposits — these carry less interest-rate risk and all else being equal, will not be impacted in a rising rate cycle (unless we get a stressed environment where credit spreads blow out).
Some examples are floating-rate and short-duration bond ETFs like FLOT, QPON and FRNS which can offer higher income with less downside from rising yields compared to broad bond ETFs like IAF which does better when rates are falling.
