Investing

Bond Market: The month that was. December 2017

  • 02.JAN.2018
  • Ian Martin,  XTB

A Quick Review: Bond Markets December 2017

  1. RBA pricing for Dec 2018 now at 1.73%
  2. 3 year bond yields increased (prices fell) by 23bps (Chart 2)
  3. 10 year bond yields increased (prices fell) by 13 bps (Chart 3)
  4. Therefore, the yield curve flattened further (Chart 4)
  5. Composite Index Performance -0.52% MoM (Table 1);
    Credit Index Performance -0.21% MOM (table 1)
  6. Best performing sector of the Index was Credit 0-3 Years +0.04% (Table 2)
  7. Another month with a strong print of labor data in Australia, (65k increase in jobs)

In the USA

  • The Fed met market expectations and raised the Federal Reserve Rate to 1.5% now equal with the RBA rate.
  • As the year closed, President Trump passed his tax bill which is expected to promote growth.
  • The US 10 year bond closed the year at 2.406%.
  • Many analysts are looking for the US 10 year bond yield to accelerate to higher levels if it can have several sessions above 2.40%.

In Australia

  • Australian bonds sold off (higher yields, lower prices).
  • The market moved back to pricing a rate hike by December 2018.
  • The RBA cash rate in December 2018 moved from 1.63% to 1.73%.
  • The yield of the 3 year government bond rose by 0.23% to 2.13% creating a price fall.
  • The 10 year government bond’s yield had a smaller rise of 0.13% to 2.63%.
  • Expect to see further analysis by commentators on this relationship as the yield curve flattened.

The Month in Charts

Chart 1: Pricing of RBA Cash Rate to Dec 2018

RBA Cash Rate to Dec 2018

Chart 2: Yield of 3 year Government Bond

3 Year Government Bond Yield

Chart 3: Yield of 10 year Government Bond

10 Year Government Bond Yield

Chart 4: AUD Government Bond Yield Curve

AUD Govrnment Bond Yield Curve

Index Performance

  • The Bloomberg AusBond Composite Index for all maturities (the common benchmark) produced a negative return of -0.52% for the month.
  • The Treasury Index for all maturities, which is the single largest contributor to the composite index, produced a negative -0.73% return.
  • The Credit Index produced a negative return of -0.21%.

 

Table 1: Index Performance

INDEX As at 29 DEC 17 1 MONTH 3 MONTH 6 MONTH 12 MONTH
Composite Bond Index All Maturities -0.52% 1.44% 1.37% 3.66%
Treasury Index All Maturities -0.73% 1.59% 1.17% 3.49%
Credit Index All Maturities -0.21% 1.49% 2.19% 5.09%

0 – 3 year corporate bonds produced a small positive. All other sectors were negative due to higher yields.

 

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

Table 2: Index by Maturity

Index MATURITY 1 MONTH 3 MONTHS 6 MONTHS 12 MONTHS
Composite Bond Index 0 – 3 Years -0.09% 0.53% 0.94% 2.25%
Treasury Index 0 – 3 Years -0.21% 0.38% 0.63% 1.68%
Credit Index 0 – 3 Years 0.04% 0.84% 1.55% 3.52%
Composite Bond Index 3 – 5 Years -0.48% 0.84% 1.06% 2.97%
Treasury Index 3 – 5 Years -0.61% 0.63% 0.60% 2.01%
Credit Index 3 – 5 Years -0.30% 1.40% 2.22% 5.37%
Composite Bond Index 5 – 7 Years -0.64% 1.41% 1.35% 3.67%
Treasury Index 5 – 7 Years -0.80% 1.18% 0.80% 2.70%
Credit Index 5 – 7 Years -0.45% 1.97% 2.70% 6.67%
Composite Bond Index 7 – 10 Years -0.74% 2.11% 1.68% 4.43%
Treasury Index 7 – 10 Years -0.90% 1.90% 1.17% 3.68%
Credit Index 7 – 10 Years -0.47% 2.93% 3.35% 7.49%
Composite Bond Index 10 + Years -1.05% 3.16% 2.11% 6.17%
Treasury Index 10 + Years -1.13% 3.14% 2.01% 6.20%
Credit Index 10 + Years -0.55% 3.43% 4.13% 8.33%

With the YTM of the 3 year government bond returning back to levels seen at the end of September, duration had a dominate influence on negative returns. This resulted in longer dated bonds performing worse than their shorter dated equivalents. In all maturity buckets investors were rewarded for holding Credit (corporate bonds) instead of government bond equivalents.

Source: Bloomberg & Australian Corporate Bond Company

Events

  • 25Apr 2018

    ANZAC DAY

  • 27Apr 2018

    YTMQF1: QANTAS 6.50% 27 APR 2020

    This is the coupon date

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