Central Bank concerns and trade wars extend bond rally
Australian bonds produced another positive monthly performance (lower yields and higher prices), with a second RBA rate cut for the year at the start of the month..
Review of the US Market
The US 10-year bond ended the month at 1.50%, down from the July month end of 2.01% with resulting higher prices. The market returned to levels last seen in August 2016. Attached is a 5 year Chart for the benchmark 10-year US government bond.
The 2-year US government bonds also decreased in yield by by 37bps to 1.50%.
Review of the Australian Market
The 10-year Australian bond finished 30bps lower in yield at 1.46% with resulting higher prices.
The 3-year government bond’s yield fell (prices higher) by 14bps to 0.67%.
These new lows reflect that the market expects possibly 2, 25bp moves by the RBA. The market is now pricing the RBA cash rate at 0.61% in Dec 2019 and 0.42% in Jun 2020.
What about corporate bonds and BBSW?
Corporate bonds mostly matched gains by the relevant Australian government bonds.
3-month BBSW continued lower, moving from 1.01% to 0.97%.
Source: Bloomberg and Australian Corporate Bond Company
The Bloomberg AusBond Composite Index for all maturities (the common benchmark) produced a positive return of 1.51% for the month reflecting lower yields (higher prices).
The Treasury Index (government bonds) for all maturities, which is the single largest contributor to the Composite Index, produced a positive return of 1.95%. This outperformed the Composite Index due to the contribution of longer dated government bonds whose price is more sensitive to interest rate changes due to their longer maturity.
The Credit Index (corporate bonds) for all maturities produced a positive return of 0.87%. The Credit index has a much smaller number of longer dated bonds than the government bond index.
When comparing corporate bonds to government bonds of the same maturity (3 – 5 years), we see the Government Bond Index returned 0.62% while the corporate bond index (Credit Index) returned 0.59%.
The best performing sub index was the Credit Index (corporate bonds) 10+ year maturity index with a return of 5.09%.