Investing

Bond Market: The month that was. April 2018

  • 01.MAY.2018
  • Ian Martin,  XTB

As concern about trade wars abated, US 10-year government bonds drifted higher (prices lower) to levels not seen since December 2013 to just over 3%.

Review of the US market

The US 10-year bond increased in yield (lower price) by 21 bps to end at 2.95% after touching 3.03% on 26 April 2018

At the front of the curve, 2-year government bond yields increase by 22bp (prices lower) reflecting the expectation of at least 2 more 25 bps increases in the overnight Fed Funds Rate.

Review of the Australian market – The two markets.

The RBA remains on hold. December 2018 pricing for the RBA Cash Rate moved 3 bps lower from 1.58% to 1.55%

The 10-year Australian bond finished 17bps higher in yield at 2.77% causing the price to fall.

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 rose (price lower) by 13 bps to 2.18% despite the market extending its timing expectation of when the RBA will move by 0.25%

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 lower. So although returns were negative, corporate bonds outperformed (less negative) than the equivalent government bonds.

BBSW remained at the forefront of discussion as banks are paying more for their funding and FRN investors are receiving higher interest payments due to what looks like a structural shift in the markets. BBSW has however come off its highs of 2.08% and is now around 2.02%.

Read more about the impact of BBSW on bank funding.

Index Performance                                                                     

As at 30 APR 2018 Maturity MTD YTD
Composite Bond Index All Maturities -0.35% 0.52%
Treasury Index All Maturities -0.56% 0.45%
Credit Index All Maturities -0.10% 0.70%
Composite Bond Index 0 – 3 Years 0.12% 0.65%
Treasury Index 0 – 3 Years 0.08% 0.62%
Credit Index 0 – 3 Years 0.14% 0.76%
Composite Bond Index 3 – 5 Years 0.00% 0.71%
Treasury Index 3 – 5 Years -0.06% 0.70%
Credit Index 3 – 5 Years 0.00% 0.82%
Composite Bond Index 5 – 7 Years -0.23% 0.49%
Treasury Index 5 – 7 Years -0.33% 0.44%
Credit Index 5 – 7 Years -0.24% 0.58%
Composite Bond Index 7 – 10 Years -0.69% 0.14%
Treasury Index 7 – 10 Years -0.82% 0.02%
Credit Index 7 – 10 Years -0.56% 0.47%
Composite Bond Index 10+ Years -1.21% 0.47%
Treasury Index 10+ Years -1.27% 0.52%
Source Bloomberg and Australian Corporate Bond Company
  • The Bloomberg AusBond Composite Index for all maturities (the common benchmark) produced a negative return of -0.35% for the month reflecting higher 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 negative -0.56% return.
  • The Credit Index (corporate bonds) for all maturities produced a smaller negative return of -0.10% reflecting the fact that government bonds have a greater weighting in longer dated bonds and generally corporate bonds outperformed their government equivalents.

 

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

Shorter dated corporate bonds were the best performers with a positive 0.14% return.

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Events

  • 29May 2018

    YTMDOW: DOWNER GROUP 5.75% 29 NOV 2018

    This is the coupon date

  • 03Jun 2018

    YTMANZ: ANZ 3.25% 03 JUN 2020

    This is the coupon date

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