There have been some curious happenings in global bond markets this month, and they are making many traders a little nervous.
Earlier in January, bond market guru Bill Gross, who once managed the world's biggest bond fund, proclaimed that after a three-decade-long bull market the tide was finally changing. The long-feared bear market was here. Bond traders: brace yourselves.
Yields on US ten-year Treasury bonds hit multi-year highs. There were rumours the Chinese government might slow, or even halt completely, its purchasing of US Treasuries – right at a time when the US was planning on doubling its supply of debt to the global market.
Similarly, the Bank of Japan recently trimmed back its bond purchases, driving up long-term yields.
If you remember anything from high school economics, it's that when a glut of supply is combined with a decline in demand, you end up with a rapid drop in prices. And with prices declining in global debt markets, many investors might start seeking out alternative securities that offer similar characteristics to fixed income investments.
This could increase the popularity of "bond proxies". These are equity investments that can provide a relatively steady and predictable income stream, in much the same way as traditional debt instruments. They include investments in infrastructure assets like toll roads and airports.
Here are three bond proxies that could receive some investor attention if the bond bear market sets in.
Auckland International Airport Limited (ASX: AIA)
Auckland is home to New Zealand's busiest airport – almost 20 million passengers went through its two terminals in the 2017 financial year. And AIA is planning significant expansions to the airport: NZ$2 billion will be spent on a number of different projects over the next five years, including a new runway and hotel.
AIA recently sold its minority 24.6% stake in North Queensland Airports (NQA) for $370 million. This cash injection should strengthen AIA's balance sheet and allow it to pursue growth opportunities in New Zealand.
AIA's underlying profit after tax for 2017 was NZ$248 million, representing an increase of 16.5% on FY16. The stock's dividend yield is about 3%, and it currently trades at 23x earnings.
Sydney Airport Holdings Pty Ltd (ASX: SYD)
As the name suggests, Sydney Airport Holdings owns and operates Australia's busiest airport. A little over 43 million people travelled through it in 2017.
Sydney Airport's results for the half ending 30 June 2017 were reasonably strong. Revenue was $714.2 million, almost 8% higher than the prior corresponding period. And profit after tax for the half was $166.6 million, representing a 4% uplift.
However, since those results were released in August the share price has moved more or less sideways, fluctuating around $7. The market consensus seems to be that at its current price of 48x earnings it is more or less fairly valued. It does pay a reasonably handsome dividend yield of 5% though.
Transurban Group (ASX: TCL)
Transurban manages urban toll roads in both Australia and the US. The company's portfolio currently consists of a network of 13 Australian toll roads that span Melbourne, Sydney and Brisbane, as well as 2 toll roads in the US state of Virginia. Together, they brought in over $2 billion in toll revenue in fiscal year 2017.
Transurban possibly delivered the best financial results of the three companies mentioned here. Underlying net profit was $209 million in 2017, up 41% on the prior year. But the company's shares already trade at a multiple of 104x earnings – which seems high. Although that might be due to the market pricing in the $9 billion worth of projects Transurban currently has in its development pipeline, including the $4 billion West Gate Tunnel project in Melbourne.
Even at these high prices, it still pays out a nice dividend yield of 4.5%.
Foolish takeaway
Sydney Airport and Transurban both offer better dividend yields than Auckland Airport, but their shares trade at much higher multiples. I would tend to think that they are heading towards being overvalued at these prices.
Auckland Airport, on the other hand, seems relatively cheap. Plus, after the sale of its stake in NQA, it now has extra cash available on its balance sheet to fund its expansionary projects, and I think it offers some growth potential over the next 5 years.
