Bond Bites

Well it’s been a big few weeks in bond markets. So, a few thoughts from us here at XTB of where we see this all going.

RBA Statement

Big news of the last few weeks has been the statement from RBA governor, Philip Lowe that the next rate move in Australia could be down. This is a pretty significant shift from where they were previously that the next rate move would be up, based on tight labour market conditions. And the market has really taken and run with it. So we’re now seeing in the futures market 100% chance of one rate cut. 25 bp by October this year and potential for a further rate cut after that.

Analysts views

We’ve got analysts such as Bill Evans from Westpac and Nomura forecasting two rate cuts. First one in July, second one in August, which is pretty aggressive. The markets really focused on GDP numbers now and we saw that come out on Wednesday. So GDP numbers came out at YOY of 2.3 vs the RBA’s forecast of 2.75, so a pretty significant difference there, and you’d have to think that leads them further towards a cut some time this year.

Interesting survey from Finder. Finder.com.au surveyed 17 leading analysts in Australia, 15 of those are forecasting now the next rate move to be down, sometime this year.

Property

Many analysts are focused on the property market, with property prices obviously falling around the country particularly in Sydney and Melbourne. UBS have really been leading the charge on this. Their view is the wealth effect, or the declining wealth effect will have a significant impact on consumption, which will lead to further rate cuts and potentially recessionary conditions in Australia. The RBA don’t seem to agree with this at this point and they see house price falls as orderly. But that’s yet to be seen.

Impact on bonds

So on the back of this we’re seeing government bonds and corporate bonds rallying, so prices up bond yields down. 3 year government bonds have fallen 20bp in the last month alone. So in this environment corporate bonds have played out really nicely and been very well supported. Going forwards we see market driven events, so GDP numbers, employment numbers will really be the factors which are going to be driving corporate bond markets in Australia and buying on the dip seems to be the best place to position yourself in the next few months.

Disclaimer

The information in this article and video is general in nature. It should not be the sole source of information. It does not take into account the investment objectives or circumstances of any particular investor. You should consider, with or without advice from a professional adviser, whether an investment is appropriate to your circumstances. Australian Corporate Bond Company Limited is the Securities Manager of XTBs and will earn fees in connection with an investment in XTBs.