The week started off quietly enough on the back of the previous Friday’s solid US labour market report but it didn’t last as rumours emerged of Deutsche Bank being unable to pay coupons on its contingent convertible hybrid (CoCo) bonds. Spreads on financial stocks to government bonds had been widening for some time as markets evaluated the impact of exposures to falling commodities prices but this news caused premiums for default insurance to rise sharply. Deutsche Bank’s CDS premiums have risen from 100bps at the start of the year to 427bps. Government bond yields initially tumbled around the world as investors fled risk assets into the safety of sovereign debt. The Barclays global high yield corporate bond index was sporting a 10% yield. The iTraxx index hit a post-GFC high as investors sought default insurance.
Into the middle of this financial market mess stepped the Fed chief, Janet Yellen, but her testimony before the US Congress simply noted the effects that offshore markets may have on US growth prospects and in the end added very little new information. However, the Fed chief did note, in response to a question, that the Fed had considered the use of negative interest rates as a possible monetary policy tool.
UK 10 year bond yields hit record lows (1.29%), US 10y bond yields made one year lows and Japan’s 10 year bonds traded at negative yields for the first time in that country’s history. In fact it was the first time that 10 year bonds from a G7 country had traded at a negative yield.
Australian bond yields largely followed the offshore lead. 3 year yields fell 8bps to finish the week at 1.75%, 10 year bond yields fell 13bps to close at 2.42% and the 20 year bond finished the week at 2.94%, down 14bps over the week. Friday saw an 18bp trading range in 10 year bonds and capped off yet another volatile week.
This week there were three Commonwealth bond tenders and one inflation-linked bond tender: $500 million of April 2029s, $600 million of April 2026s and $600 million of March 2019s issued with coverage ratios of 2.95, 3.15 and 2.97 respectively. The inflation-linked bond tender sold $150 million worth of August 2040s at a yield of inflation + 1.0126% and a coverage ratio of 2.6067
AUST GOVT BONDS
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