04 Jul – 08 Jul 2016

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A messy and close federal election result following a week of Brexit worries has seen long dated bond yields fall despite yields continuing to fall to record low levels and despite warnings from the major ratings agencies that a lack of budget repair is risking Australia’s AAA rating. Australian 3 year bonds were flat (closing at 1.46% for the week) but 10 year bonds fell 7bps to 1.89% and 20 year bonds fell 12bps to 2.39%.

In a broader sense Australian yields typically follow US yields and US yields have been falling even as even as the latest US employment figures for June came in stronger than expected, a piece of news which would normally lead to higher US rates. The word “bubble” is starting to appear more often in the press in regards to bond markets. It is perhaps understandable given the seemingly unstoppable global march of yields towards zero (and beyond in the case of Europe and Japan) but it does indicate a degree of unease about the state of benchmark bond yields and the effects of central banks’ bond purchase programmes.

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The central bank actions are intended to keep yields low as a way to stimulate investment and consumption in Europe, Japan and the US. The programmes have been successful in producing record low bond yields; the US 10 year yield is now 1.36%, the UK’s comparable yield is 0.73% and yields are close to or below zero in France (0.11%) , Germany (-0.19%) and Japan (-0.29%). Where these programmes have not been successful is in terms of spending and new investment. The lack of a rise in these two parts of the economy is put forward by various central bank officials as the reason for extending the programmes.

Negative yields in Europe and Japan are driving investors to other markets where there is still a positive yield, such as the UK, the US and Australia.

This week the AOFM issued $1.9 billion of bonds and $500 million of Treasury notes. The bonds were split between $400 million June 2035s, $700 million May 2028s and $800 million November 2028s with coverage ratios of 2.33758, 2.5357 and 3.0250 respectively.

Complete list of government and corporate debt issues

AUST GOVT BONDS

MATURITYCOUPON
(%)
ISSUE
SIZE ($M)
CLOSING
YIELD
Δ WEEKΔ MONTHWEEK
HIGH
WEEK
LOW
15-Feb-176.00118281.640.02-0.051.651.62
21-Jul-174.25189001.620.03-0.081.631.61
21-Jan-185.50205001.580.03-0.071.611.55
21-Oct-183.25181001.570.01-0.041.611.55
15-Mar-195.25229471.540.01-0.051.571.51
21-Oct-192.75217001.530.01-0.081.571.51
15-Apr-204.50233971.530.00-0.101.571.51
21-Nov-201.75152001.560.00-0.161.621.54
15-May-215.75243991.60-0.02-0.161.661.58
15-Jul-225.75214001.67-0.04-0.241.761.66
21-Apr-235.50213001.74-0.04-0.261.841.72
21-Apr-242.75247001.81-0.06-0.301.921.79
21-Apr-253.25261001.85-0.06-0.331.971.83
21-Apr-264.25291001.88-0.07-0.352.011.86
21-Apr-274.75256001.93-0.07-0.362.061.91
21-Nov-272.75104001.98-0.07-0.372.111.96
21-May-282.2570002.03-0.09-0.392.172.01
21-Apr-293.25120002.07-0.09-0.392.222.06
21-Apr-334.50107002.22-0.12-0.432.402.22
21-Jun-352.7555502.38-0.11-0.432.552.38
21-Apr-373.7588002.42-0.12-0.432.602.42
21-Jun-393.2540002.52-0.14-0.442.702.52