US 10-year bonds began the month at 2.95% and moved to a high of 3.11% allowing bearish commentators an “I told you so” moment. The bonds broke through the historical resistance level of 3.04%. The back drop was colored by ‘on again and off again’ tariff discussions and the summit with North Korea. Then as a reminder that northern hemisphere summers can be a time of caution, Italian politics came to the forefront as coalition parties tried to form a government and nominated an anti-Euro candidate as Finance Minister (remember Greece?).
A flight to safety occurred and the US 10-year bond fell in yield (rallied in price) to 2.76% before closing the month at 2.86%. With no change in Australian fundamentals, Australian Bonds tracked their US counterparts.
Review of the US Market
- The US 10-year bond decreased in yield (higher price) by 9 bps to end at 2.86% after touching 3.11% on 17 May 2018
- At the front of the curve, 2-year government bond yields decreased by 6 bps (prices higher).
- The market still expects a 25 bps rate hike in the Fed Funds rate in June despite the turmoil in Italian politics.
Review of the Australian Market
- The RBA remains on hold. The December 2018 pricing for the RBA Cash Rate moved 4 bps lower from 1.55% to 1.51% (the current RBA cash rate is 1.50%).
- The 10-year Australian bond finished 10 bps lower in yield at 2.67% (prices higher).
- 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 8 bps to 2.10%
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 slightly higher.
3 month BBSW moved lower from 2.03% to 1.97%
|As at 31 May 2018||Maturity||MTD||YTD|
|Composite Bond Index||All Maturities||0.69%||1.48%|
|Treasury Index||All Maturities||0.81%||1.71%|
|Credit Index||All Maturities||0.49%||1.17%|
|Composite Bond Index||0 – 3 Years||0.26%||0.68%|
|Treasury Index||0 – 3 Years||0.29%||0.68%|
|Credit Index||0 – 3 Years||0.30%||0.78%|
|Composite Bond Index||3 – 5 Years||0.49%||1.12%|
|Treasury Index||3 – 5 Years||0.53%||1.17%|
|Credit Index||3 – 5 Years||0.48%||1.08%|
|Composite Bond Index||5 – 7 Years||0.76%||1.50%|
|Treasury Index||5 – 7 Years||0.86%||1.55%|
|Credit Index||5 – 7 Years||0.60%||1.37%|
|Composite Bond Index||7 – 10 Years||0.95%||1.91%|
|Treasury Index||7 – 10 Years||1.00%||1.92%|
|Credit Index||7 – 10 Years||0.76%||1.80%|
|Composite Bond Index||10+ Years||1.31%||2.84%|
|Treasury Index||10+ Years||1.31%||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 0.69% 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