Investing

Bond Market: The month that was August 2018

  • 03.SEP.2018
  • Ian Martin,  XTB

A positive month for bonds in Australia as interest rates on bonds moved lower. US 10-year bonds also finished the month lower at 2.86%. Again, the backdrop was colored by tariff discussions moving towards a trade war.

Review of the US market

The US 10-year bond ended the month at 2.86% with an intra-month high of 3.00% and a low of 2.82%. A very similar price action as seen in May. This reinforces last month’s comment that breaking through 3.00% briefly has not, for the moment, been the beginning of the end but simply defining a new range for now. We are comfortable that the yield to maturity of US government bonds will move higher but it will not be the doomsday scenario of so many commentators.

At the front of the curve, 2-year government bond yields decreased by only 4 bps (prices higher). This smaller move by shorter dated bonds reflects that the market is still expecting 2 more Fed hikes.

Review of the Australian market

The RBA remains on hold.  The December 2018 pricing for the RBA cash rate remained unchanged at 1.50% (the current RBA cash rate is 1.50%). At the end of the month Westpac increased mortgage rates and commentators believe this fiscal tightening by banks will remove the necessity for the RBA to increase rates. Many commentators are calling for RBA rates to be on hold until 2020.

The 10-year Australian bond finished 13bps lower in yield at 2.52% with higher prices.

The 10-year Australian government bond yield remains below the 10-year US government bond yield but tracked the change in yield closely.

The 3-year government bond’s yield also fell (prices higher) by 11 bps to 1.97%

 

What about corporate bonds and BBSW?

Credit spreads or the premium required to hold a corporate bond instead of a government bond have generally drifted higher again.

3-month BBSW was basically unchanged moving from 1.96% to 1.95%.

As we have discussed, the new levels of BBSW are starting to reflect in higher borrowing rates from bank customers and therefore putting a constraint on the economy even though the RBA is not changing its official rate.

Index Performance

  As at 31 AUG 2018 Maturity MTD YTD
Composite Bond Index All Maturities 0.81% 2.68%
Treasury Index All Maturities 0.94% 2.86%
Credit Index All Maturities 0.76% 2.56%
Composite Bond Index 0 – 3 Years 0.30% 1.58%
Treasury Index 0 – 3 Years 0.30% 1.52%
Credit Index 0 – 3 Years 0.37% 1.89%
Composite Bond Index 3 – 5 Years 0.66% 2.46%
Treasury Index 3 – 5 Years 0.65% 2.46%
Credit Index 3 – 5 Years 0.77% 2.71%
Composite Bond Index 5 – 7 Years 0.89% 2.87%
Treasury Index 5 – 7 Years 0.94% 2.93%
Credit Index 5 – 7 Years 1.06% 2.93%
Composite Bond Index 7 – 10 Years 1.18% 3.05%
Treasury Index 7 – 10 Years 1.20% 2.90%
Credit Index 7 – 10 Years 1.29% 3.28%
Composite Bond Index 10+ Years 1.50% 4.44%
Treasury Index 10+ Years 1.54% 4.52%
Source Bloomberg and Australian Corporate Bond Company

The Bloomberg AusBond Composite Index for all maturities (the common benchmark) produced a positive return of 0.81% 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 0.94% return.

The Credit Index (corporate bonds) for all maturities produced a smaller positive return of 0.76% reflecting the fact that government bonds have a greater weighting to longer dated bonds

It is worth looking into sectors of the markets to see where the best returns were to be had.

Longer dated  (10+ years) government bonds were the best performers with a positive 1.54% return.  But, it should be noted these bonds are the most sensitive to any interest rate changes

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 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.

Events

  • 21Sep 2018

    YTMWOW: WOOLWORTHS 6.00% 21 MAR 2019

    This is the coupon date

  • 28Sep 2018

    YTMWES: WESFARMERS 6.25% 28 MAR 2019

    This is the coupon date

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