The focus of bonds markets both here and offshore was on the aftermath of the FOMC’s decision to leave the US federal funds rate unchanged and the comments from Fed officials in the days afterwards, including Janet Yellen’s speech on “Inflation Dynamics and Monetary Policy”, in which she said she still anticipated a rate increase this year.
Further weaknesses in key commodity prices and the scandal at Volkswagen added to the safety first approach that saw bond yields fall. Australian 3y rates finished the week down 3bps to 1.87% but still at the higher end of the week’s trading range of 1.81% to 1.91%. The 10y bond rate finished at the low end of the 2.65% – 2.81% trading range, closing down 8bps at 2.72%. The new 20y bond futures contract began trading with the implied yield closing the week at 3.26%.
In global 10y bonds the US rose 3bps to 2.16% while in the rest of the world rates hardly moved at all. UK rates were effectively unchanged over the week at 1.73%, Japanese rates were down 1bp to 0.32%, French bonds were unchanged at 0.96% and German rates increased by 1bps to 0.65%. Italian rates bucked the trend and rose 3bps to 1.79%.
There were four Commonwealth bond tenders; three “vanillas” and one inflation linked bond. There were $700m of April 2026s, $700m of October 2018s, $300m of April 2033s and $700m of October 2030 ILBs. Coverage ratios were 2.121, 4.271, 2.393, 2.000 respectively. Unlike the previous issue of inflation linked bonds earlier this month, this one was issued at a positive yield of 0.8738%, reflecting the much longer maturity date and thus the chance of inflation re-emerging in this period.
AUSTRALIAN GOVERNMENT BONDS
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