Investing

Bond Market: The month that was July 2018

  • 01.AUG.2018
  • Ian Martin,  XTB

Movements in Australian interest rates were relatively benign despite US 10-year bonds finishing the month at 2.96%. This is 10bp higher than the month’s previous close.

Review of the US market

The US 10-year bond ended the month on its highest YTM at 2.96% for the month. It seems after previous months trading through 3.00% to touch 3.11% the market has settled into a 2.80% to 3.00% range. Breaking through 3.00% briefly has not, for the moment, been the beginning of the end but simply defining a new range for now. This new but higher trading range has been supported by the view the federal reserve will continue with its expected rate hikes.

At the front of the curve, 2-year government bond yields increased by 14bp (prices lower). This continues the curve flattening observed throughout the year.

Review of the Australian market

The RBA remains on hold. The December 2018 pricing for the RBA cash rate remained at 1.50% (the current RBA cash rate is 1.50%).

The 10-year Australian bond finished 2bps higher in yield at 2.65% with slightly lower prices.

The 3-year government bond’s yield also fell (prices higher) by 2bps to 2.08%

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 during the month but recovered to finish unchanged.

3-month BBSW moved back to 1.96% from 2.11%. Possibly as year-end funding pressure was removed from market forces.

Index Performance

  As at 31 JUL 2018 Maturity MTD YTD 12 Months
Composite Bond Index All Maturities 0.16% 1.85% 3.25%
Treasury Index All Maturities 0.11% 1.91% 3.10%
Credit Index All Maturities 0.24% 1.79% 4.01%
Composite Bond Index 0 – 3 Years 0.16% 1.28% 2.23%
Treasury Index 0 – 3 Years 0.12% 1.21% 1.85%
Credit Index 0 – 3 Years 0.23% 1.51% 3.08%
Composite Bond Index 3 – 5 Years 0.18% 1.80% 2.88%
Treasury Index 3 – 5 Years 0.16% 1.80% 2.41%
Credit Index 3 – 5 Years 0.24% 1.92% 4.18%
Composite Bond Index 5 – 7 Years 0.20% 1.97% 3.34%
Treasury Index 5 – 7 Years 0.17% 1.97% 2.79%
Credit Index 5 – 7 Years 0.22% 1.85% 4.60%
Composite Bond Index 7 – 10 Years 0.17% 1.85% 3.56%
Treasury Index 7 – 10 Years 0.11% 1.68% 2.87%
Credit Index 7 – 10 Years 0.27% 1.97% 5.38%
Composite Bond Index 10+ Years 0.06% 2.90% 5.06%
Treasury Index 10+ Years 0.04% 2.94% 5.01%
Source Bloomberg and Australian Corporate Bond Company
  • The Bloomberg AusBond Composite Index for all maturities (the common benchmark) produced a positive return of 0.69% for the month reflecting lower yields particularly of longer dated government bonds.
  • The Treasury Index (government bonds) for all maturities which is the single largest contributor to the composite index produced a positive 0.81% return.
  • The Credit Index (corporate bonds) for all maturities produced a smaller positive return of 0.49% reflecting the fact that government bonds have a greater weighting to longer dated bonds and generally corporate bonds underperformed their government equivalents.

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

Longer dated (10+ years) government bonds were the best performers with a positive 1.31% 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

  • 28Jun 2019

    YTMAST: AUSNET 5.75% 28 JUN 2022

    This is the coupon date

  • 15Jul 2019

    YTMTLS: TELSTRA 7.75% 15 JUL 2020

    This is the coupon date

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