April 2019: Australian bonds continue to perform after weak inflation data
Australia has continued its own narrative for bond bulls (those expecting lower yields and higher prices). QoQ Inflation printed at 0.0% cementing bond bull’s control on the market. Gains in prices (lower yields) continued for another month as bond yields touched all-time lows in Australia.
Review of the US Market
The US 10-year bond ended the month at 2.50%, up from the March month end of 2.41%. This resulted in lower prices with the market giving up some recent gains in price.
There was a smaller movement in 2-year US government bonds which also increased in yield by 1bps to 2.27%. This reflects a more realistic view that the Fed is on hold for the short term.
The US curve is no longer regarded as being inverted, so commentary around the inversion being a predictor of a recession has subsided.
Review of the Australian Market
The 10-year Australian bond finished 1bp higher in yield at 1.79%
The 3-year government bond’s yield fell (prices higher) by 11bps to 1.28%.
These new lows reflect that the market expects more than one 25bp move by the RBA. The market is now pricing the RBA cash rate at 1.02% in Dec 2019 and 0.95% in Jun 2020.
What about corporate bonds and BBSW?
Corporate bonds also made further gains from tightening credit spreads, this is the premium required to hold a corporate bond instead of a government bond. Therefore, corporate credit indices outperformed government bond indices with similar maturities. This pricing behaviour is not surprising, as the lower interest rates are driven by inflation. As a result, expectations and therefore investors, move to corporate bonds in search of extra yield.
3-month BBSW continued lower, moving from 1.87% to 1.56%. Given that wholesale borrowing rates are cheaper, we would expect to see bank deposit rates come under a pressure.
Source Bloomberg and Australian Corporate Bond Company
The Bloomberg AusBond Composite Index for all maturities (the common benchmark) produced a positive return of 0.28% for the month reflecting mostly lower yields (higher prices).