Bonds continue to rally supported by RBA expectations and global growth concerns.
Australian bonds produced another impressive monthly performance (lower yields and higher prices). This was despite there being no move by the RBA at the start of the month. However, comments from the Governor of the RBA gave market commentators the confidence to predict 2 and possibly 3 rate cuts starting in June.
Globally, bond markets also performed well as trade tensions mounted, affecting growth forecasts. Geo political tensions rose as the USA and Iran backed further away from a nuclear agreement.
Review of the US Market
The US 10-year bond ended the month at 2.12%, down from the April month end of 2.50%. This resulted in higher prices and the market returning to levels last seen in August 2017. The following chart shows yields over a 5-year period for the benchmark 10-year US government bond.
There was similar movement in 2-year US government bonds, which also decreased in yield by 34bps to 1.92%.
The curve ended the month inverted as recession fears rose again. For our yield curve comparison, we use 3-month treasury bills vs 10-year benchmark bonds.
Review of the Australian Market
The 10-year Australian bond finished 33bps lower in yield at 1.46%, with prices moving higher.
The 3-year government bond’s yield fell (prices rose) by 18bps to 1.10%.
These new lows reflect that the market expects at least two and possibly three 25bp moves by the RBA. The market is now pricing the RBA cash rate at 0.89% in Dec 2019 and 0.81% 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 1.56% to 1.42%. Given that wholesale borrowing rates are cheaper than before, we are starting 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 1.70% 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 2.09%. It outperformed the Composite Index due to the contribution of longer dated government bonds, the price of which are more sensitive to interest rate changes due to their longer maturity.
The Credit Index (corporate bonds) for all maturities produced a positive return of 1.19%. 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 0.79%, while the corporate bond index (Credit Index) returned 1.01%.
The best performing sub index was the Treasury (government bonds) 10+ year maturity Index with a return of 4.46%.