Last month was described as “mixed” for bonds but October was unequivocally a bad one for bond investors and indices other than Bank Bills and FRNs returned negative numbers.
The Floating Rate Note index was the best performing index for the month and it returned +0.199% while the Bank Bill Index returned 0.146%. Floating rate notes and bank bills are insulated from rising yields by their very nature, while fixed-rate bonds increase in sensitivity to yield changes as maturity dates increase.
Rising yields were driven by a turn in sentiment which came about as questions arose as to the sustainability of the ECB’s bond purchase programme. The ECB has purchased some many (mostly German) bonds it has approached a limit which has come about because of the rules of the programme and the diminishing number of bonds left in the hands of non-ECB holders. Investors looked at this, added it to an expected US rate increase and decided the era of low rates and yields may be closer than previously thought.
European rates rose and by the end of October, even German 10 year bunds were back in positive (yield) territory. In an interconnected, global economy, higher yields in Europe flowed elsewhere and Australian 10 year bond yields were among those which suffered the greatest, with only yields on UK 10 year gilts moving by a larger amount.
As a consequence, investors with bonds in any of the corporate, semi-government or Commonwealth bond sectors fared poorly. The Corporate Bond Index returned -0.565%, the Semi-Government Bond Index returned -0.844% and the Government Bond Index returned -1.831%. The Composite Index, being a mix of bonds from each sector, returned -1.276%. The increasingly-negative nature of the returns was largely a function of the average duration of bonds in each index rather a change in the average spread between the three types of bonds, although corporate spreads did widen, while semi-government spreads contracted.
Despite poor returns this month, 12 month returns for each of the sectors are still respectable. The best performing sector was the semi-government one and its index returned 4.37%, with the Corporate Bond Index just slightly behind at 4.32%.
|Security||1m Return (%)||12m Rolling Return||6m Rolling Return|