After a series of data releases during the month, wage data probably received the most attention due to the lack of wage inflation. Bond yields rallied (lower yields, higher prices). The market continued to price a lower probability of a rate hike during 2018.
The pricing of the RBA cash rate for December 2018 moved from 1.70% to 1.63%. The yield of the 3 year government bond fell by 0.08% to 1.90% creating a price rise. The 10 year government bond’s yield also fell by 0.17% to 2.50%. Because the 10 year bond is longer dated than the 3 year bond, its price had a larger appreciation which is reflected in the performance of the sub- indices.
The Month in Charts
Chart 1: Pricing of RBA Cash rate in 12 months
Chart 2: Yield of 3 year Government Bond
Chart 3: Yield of 10 year Government Bond
- The Bloomberg AusBond Composite Index for all maturities (the common benchmark) produced a positive return of 0.87% for the month.
- The Treasury Index for all maturities which is the single largest contributor to the Composite Index produced a positive 1.08% return benefitting from the contribution of longer dated bonds.
- The Credit index produced a positive return of 0.72%.
|INDEX||As at 30 NOV 17||1 MONTH|
|Composite Bond Index||All Maturities||0.87%|
|Treasury Index||All Maturities||1.08%|
|Credit Index||All Maturities||0.72%|
0 – 5 year corporate bonds still produced positive returns but long dated bonds were the winners.
It is worth looking into sectors of the markets to see where the best returns were to be had.
|Index||MATURITY||1 MONTH||YEAR TO DATE|
|Composite Bond Index||All Maturities||0.87%||4.20%|
|Treasury Index||All Maturities||1.08%||4.25%|
|Credit Index||All Maturities||0.72%||5.30%|
|Composite Bond Index||0 – 3 Years||0.23%||2.34%|
|Treasury Index||0 – 3 Years||0.24%||1.90%|
|Credit Index||0 – 3 Years||0.30%||3.47%|
|Composite Bond Index||3 – 5 Years||0.47%||3.47%|
|Treasury Index||3 – 5 Years||0.45%||2.64%|
|Credit Index||3 – 5 Years||0.63%||5.69%|
|Composite Bond Index||5 – 7 Years||0.82%||4.34%|
|Treasury Index||5 – 7 Years||0.80%||3.53%|
|Credit Index||5 – 7 Years||1.03%||7.15%|
|Composite Bond Index||7 – 10 Years||1.31%||5.21%|
|Treasury Index||7 – 10 Years||1.31%||4.63%|
|Credit Index||7 – 10 Years||1.56%||8.00%|
|Composite Bond Index||10 + Years||2.09%||7.30%|
|Treasury Index||10 + Years||2.13%||7.41%|
|Credit Index||10 + Years||2.02%||8.93%|
Duration benefitted returns during the month and therefore 7-10 and 10+ maturity buckets were the best performers for the month.
On a year to date basis, overall the Credit Index is still outperforming the Composite Index and longer dated corporate bonds are currently showing the largest return. It should be noted that longer dated bonds have greater sensitivity to interest rate movement. Should the bond bears regain control, these returns could be eroded.
Source: Bloomberg & Australian Corporate Bond Company