Investing

Bond Market: The month that was March 2018

  • 09.APR.2018
  • Ian Martin,  XTB

Trade wars have greatest impact on sentiment

March saw the expected first of three, possibly four increases by the US Federal Reserve, strong US payrolls and the RBA creating new records for how long it can stay on hold. However, it was trade wars that affected sentiment and bonds generally produced positive returns.

Review of the US market

  • The US 10-year bond decreased in yield (higher price) by 12 bps to end at 2.74%
  • The fall in yield (increase in price) was due to a more risk-off environment and this was reflected in the S&P 500 falling 2.69%
  • However, at the front of the curve 2-year government bond yields increase by 2 bps (prices lower) reflecting the 25 bps increase in the overnight Fed Funds Rate.

 

Review of the Australian market – the two markets.

  • No news challenged the view that the RBA is on a different path (on hold) than the US FED (increasing rates).  In fact, the December 2018 pricing for the RBA cash rate moved 4 bps lower from 1.62% to 1.58%
  • The 10-year Australian bond finished 21 bps lower in yield at 2.60% causing the price to rise
  • The 10-year Australian government bond yield remains below the 10-year US government bond yield
  • The 3-year government bond’s yield fell (price higher) by 3 bps to 2.05%.

 

What about Corporate Bonds

Credit spreads or the premium required to hold a corporate bond instead of a government bond, have generally drifted higher but still produced a positive total return.

BBSW has come to 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. Read more about this here. 

Index Performance                                                                     

As at 29 MAR 2018 Maturity MTD YTD
Composite Bond Index All Maturities 0.84% 1.14%
Treasury Index All Maturities 1.19% 1.46%
Credit Index All Maturities 0.41% 0.78%
Composite Bond Index 0 – 3 Years 0.11% 0.30%
Treasury Index 0 – 3 Years 0.13% 0.31%
Credit Index 0 – 3 Years 0.12% 0.35%
Composite Bond Index 3 – 5 Years 0.28% 0.62%
Treasury Index 3 – 5 Years 0.32% 0.70%
Credit Index 3 – 5 Years 0.23% 0.60%
Composite Bond Index 5 – 7 Years 0.59% 0.96%
Treasury Index 5 – 7 Years 0.67% 1.02%
Credit Index 5 – 7 Years 0.56% 1.00%
Composite Bond Index 7 – 10 Years 1.24% 1.64%
Treasury Index 7 – 10 Years 1.38% 1.74%
Credit Index 7 – 10 Years 1.05% 1.60%
Composite Bond Index 10+ Years 2.55% 2.75%
Treasury Index 10+ Years 2.71% 2.87%
  • The Bloomberg AusBond Composite Index for all maturities (the common benchmark) produced a positive return of 0.84% for the month reflecting the 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 1.19% return
  • The Credit Index (corporate bonds) for all maturities produced a positive return of 0.41% reflecting the fact that government bonds have a greater weighting to longer dated bonds and generally corporate bonds under-performed their government equivalents. This is not uncommon in a “risk off” environment.

 

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

  • Long dated government bonds (10+ years) were the best performers. They benefit from a bull flattener:
    • Bull – because bond price rose and yields fell
    • Flattener – because longer dated yields fell more than shorter dated yields
  • Corporate bond indices under-performed their government bond equivalent and this was due to the widening of credit spreads discussed earlier.

 

Source: Bloomberg and Australian Corporate Bond Company

 

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.

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