Aussie bonds continue to perform supported by RBA cut. US bonds tread water.
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 2.01%, unchanged from the June month end.
2-year US government bonds actually rose in yield by 12bps to 1.87%.
Review of the Australian Market
The 10-year Australian bond finished 14 bps lower in yield at 1.19% with resulting higher prices.
The 3-year government bond’s yield fell (prices higher) by 15bps to 0.81%.
These new lows reflect that the market expects at least 1 and possibly 2, 25 bp moves by the RBA. The market is now pricing the RBA cash rate at 0.67% in Dec 2019 and 0.54% 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 1.20% to 1.01%. Given that wholesale borrowing rates (BBSW) are cheaper than before, we expect to see bank deposit rates being lowered.
Source Bloomberg and Australian Corporate Bond Company
The Bloomberg AusBond Composite Index for all maturities (the common benchmark) produced a positive return of 0.95% 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 0.96%.
The Credit Index (corporate bonds) for all maturities produced a positive return of 1.02%. The Credit index has a much smaller number of longer dated bonds than the government bond index but like for like credit bonds outperformed their government equivalants..
When comparing corporate bonds to government bonds of the same maturity (3 – 5 years), we see the Government Bond Index returned 0.64% while the corporate bond index (Credit Index) returned 1.07%.
The best performing sub index was the Credit Index (corporate bonds) 10+ year maturity index with a return of 2.56%.