Bond Market: The month that was June 2018

  • 04.Jul.2018
  • Ian Martin,  XTB

.Movements in Australian interest rates were relatively benign despite the second 0.25% increase in the US Federal Reserve Rate. US 10-year bonds finished the month unchanged at 2.86% despite touching a high of 3.11% in the previous month. Again the back drop was colored by tariff discussions moving towards a trade war.

Review of the US Market

The US 10-year bond ended unchanged at 2.86% with an intra month high of 2.97% and a low of 2.82%, backing away from May’s high of 3.11%.

At the front of the curve, 2-year government bond yields increased by 12bp (prices lower). This reflected the second 25bp rate hike in the Fed Funds Rate in 2018.

The unchanged 10-year bond and increasing yields of shorter dated 2-year bonds is creating a flatter yield curve. Many commentators are wondering if this is indicating that the US is close to an economic slow down or the effects of the removal of Quantitative Easing or QE (which is now being referred to as Quantitative Tightening or QT).

Review of the Australian Market

The RBA remains on hold. The December 2018 pricing for the RBA Cash Rate moved 1bps lower from 1.51% to 1.50% (The current RBA Cash Rate is 1.50%).

The 10-year Australian Government Bond finished 2bps lower in yield at 2.63% 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 Australian Government Bond yield also fell (prices higher) by 3bps to 2.06%

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 rose from 1.97% to 2.11%. There is clearly pressure on this rate due to banks being less willing to lend to each other as they approach financial year end. Generally, commentators are regarding these levels as reflective of a new normal due to structural changes previously discussed.

The new levels of BBSW are starting to result 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 29 June 2018 Maturity MTD YTD
Composite Bond Index All Maturities 0.39% 1.69%
Treasury Index All Maturities 0.41% 1.80%
Credit Index All Maturities 0.27% 1.54%
Composite Bond Index 0 – 3 Years 0.18% 1.11%
Treasury Index 0 – 3 Years 0.17% 1.09%
Credit Index 0 – 3 Years 0.20% 1.27%
Composite Bond Index 3 – 5 Years 0.37% 1.61%
Treasury Index 3 – 5 Years 0.36% 1.63%
Credit Index 3 – 5 Years 0.34% 1.68%
Composite Bond Index 5 – 7 Years 0.42% 1.76%
Treasury Index 5 – 7 Years 0.38% 1.79%
Credit Index 5 – 7 Years 0.35% 1.62%
Composite Bond Index 7 – 10 Years 0.41% 1.68%
Treasury Index 7 – 10 Years 0.35% 1.57%
Credit Index 7 – 10 Years 0.25% 1.69%
Composite Bond Index 10+ Years 0.81% 2.83%
Treasury Index 10+ Years 0.81% 2.89%
 Source Bloomberg and Australian Corporate Bond Company

The Bloomberg AusBond Composite Index for all maturities (the common benchmark) produced a positive return of 0.39% for the month reflecting slightly lower yields

The Treasury Index (government bonds) for all maturities, which is the single largest contributor to the Composite Index produced a positive 0.41% return.

The Credit Index (corporate bonds) for all maturities produced a smaller positive return of 0.27%. This reflected the fact that government bonds have a greater weighting to longer dated bonds. Generally corporate bonds under-performed 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 0.81% return. But, it should be noted these bonds are the most sensitive to any interest rate changes.

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.


  • 26Oct 2021

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