The US cash rate is essentially the benchmark rate for the world’s financial markets. With the Fed FOMC to meet soon, and the prospect of the first interest rate rise in a decade, US cash rate markets were somewhat surprisingly only pricing in a 23% chance of a rate rise. A rate move in December is more likely. There are international calls for US rates to remain on hold in order to not destabilise world growth prospects but the Federal Reserve’s charter is to consider US employment and inflation only. On that front, US unemployment is nudging a recent low of 5% without any strong signs of US inflation at this stage.
Domestic economic data is impacting our market and this week saw a drop in unemployment to 6.2%, consumer sentiment and business confidence down but business conditions rise. The Australian 10y bond rate rose in a week marked essentially by one day (Wednesday) of volatility – a spike in US yields after Treasury bond auctions placed upwards pressure on rates and then flowed through to our markets. 3y yields rose 16bps to 1.90% while 10y yields rose 11bps to close the week at 2.77%. There were elevated levels of trading as the market neared expiry of the September 3y and 10y bond contracts (15 Sept) and traders ‘rolled’ their exposures from the September to the new December contract. The December futures contracts have the same underlying physical basket of bonds as September.
US rates rose from 2.13% to 2.19% while in the rest of the world 10y rates hardly moved at all; UK rates were effectively unchanged over the week at 1.72%, French rates eased 2bps to 0.99% and German rates eased 1bps to 0.65%. Italian rates dropped 4bps. The difference in directions is perhaps a reflection of the different positions in which the US and Euro economies finds themselves in the economic cycle.
There were three bond tenders last week, two “vanillas” and one index linked. The index linked bond tender was the first of the three in the week and it came in with negative real yield (see our report) of -1.69bps with a coverage ratio of 3.987. It was followed by $900m Apr 2027 and $800m Oct 2018 with coverage ratios of 1.778 and 3.23 respectively.
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