I was going to start mouthing-off about some utterly inane remarks made by super fund bosses in a certain newspaper, but I will refrain. If you do want to read a good article on the bond market, try this in the AFR today. For the uneducated, however, let me make a few quick points:
First, like shares, bonds give investors both income and capital gains/losses depending on changes in interest rates (for fixed-rate bonds) and credit spreads (for floaters).
Second, Aussie government bonds have given investors incredible total returns since 2008 and have been a massively important source of diversification for anyone holding them. Any investor that has been going underweight cash or fixed-income in favour of equities since 2008 has been smashed, as I've regularly predicted here.
Third, Aussie government bonds have delivered exceptional total returns in 2012--of about 8%--and the low yield is irrelevant in this context. Of course, there are future risks if inflation rears its head. Personally, I am worried about capital losses on fixed-rate bonds at some point in the future when we come out the other side of this crisis.
Fourth, while currently at all time lows, yields on government bonds in Australia could still fall a long way if the offshore crisis deepens. This would in turn generate fat capital gains.
Finally, Aussie super funds and their advisors have been terrible market timers. As I have argued here too many times to count, super funds have a huge "strategic" asset-allocation problem when it comes to cash/fixed-income. They need to increase their portfolio weights substantially to get this strategic allocation right. Trying to confuse people with comments about tactical timing of asset-allocation (and bonds particularly) when your foundation/strategic allocation is totally screwy is just more super fund stupidity.
