Bonds continue to rally in end of financial year

Australian bonds produced another positive monthly performance (lower yields and higher prices), despite no move by the RBA at the start of the month.

Review of the US Market

The US 10-year bond ended the month at 2.01%, down from the May month end of 2.12% with resulting higher prices

There was a similar movement in 2-year US government bonds which also decreased in yield by 17bps to 1.75%.

Review of the Australian Market

The 10-year Australian bond finished 14 bps lower in yield at 1.32% with resulting higher prices.

The 3-year government bond’s yield also fell (prices higher) by 14bps to 0.96%.

These new lows reflect that the market expects at least 2 and possibly 3, 25 bp moves by the RBA. The market is now pricing the RBA cash rate at 0.77% in Dec 2019 and 0.67% in Jun 2020.

What about corporate bonds and BBSW?

Corporate bonds mostly outperformed gains by the relevant Australian government bonds.

3-month BBSW continued lower, moving from 1.41% to 1.20%.

Index Performance

Source Bloomberg and Australian Corporate Bond Company

The Bloomberg AusBond Composite Index for all maturities (the common benchmark) produced a positive return of 1.04 % 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 1.12%.  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 0.89%. 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 0.63% while the corporate bond index (Credit Index) returned 0.89%.

The best performing sub index was the Credit Index (corporate bonds) 10+ year maturity index with a return of 2.64%.

Disclaimer

The information in this article 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 read the PDS that relates to that Class of XTB prior to making an investment decision and 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.