18 Jul – 22 Jul 2016

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This week it seems that local factors were uppermost in investors’ minds as US, UK and European bond rates barely moved. The Australian the 10 year bond yield was down 6bps to 1.92% but the move in the 3 year bond yields stands out as it dropped by 11 bps to 1.41%. This was largely to do with a change in the market’s view of RBA’s future actions on the release of the RBA minutes.

The release of the June quarter CPI (due on Wed 27 July) has been a major focus with markets convinced that another low number will result in a rate cut when the RBA next meets in the first week of August.

Offshore bond yield movements were quite sedate and not affected by IMF growth forecasts which have been lowered yet again. The ECB kept its official rate steady, asset purchases at €80 billion per month (nearly €1 trillion per year) and made standard statements about waiting for more information over coming months. European markets did not read too much into it. The German 10 year bond rate is back below zero at -0.03%, while 10 year yields in France, Italy and the UK all declined by 0 to 3 bps. In the US the 10 year rate also fell and, as with the Europeans, only by a couple of basis points and even Japanese yields were in line with the others.

3year-bond-22jul16

All in all it felt like a quiet week and the low yields available (including negative yields for international bond investors) are distorting most investor’s standard investment theory about bonds. YieldReport couldn’t help but chuckle to read in the Financial Review a quote by Queensland Investment Corporation’s Katrina King who said that we are in a strange world where investors “buy bonds for capital gains and equity for income – it should be the other way around”.

This week the AOFM went a bit harder than usual and issued $1.9 billion of vanilla bonds and $500 million of Treasury notes. The bond sales comprised $300 million June 2035s, $600 million April 2020s and $1 billion November 2027s with coverage ratios of 3.23, 3.13 and 3.86 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-176.00118281.63-0.030.021.651.63
21-Jul-174.25189001.59-0.050.011.641.59
21-Jan-185.50205001.51-0.11-0.091.611.51
21-Oct-183.25181001.52-0.10-0.081.611.52
15-Mar-195.25229471.48-0.10-0.081.571.48
21-Oct-192.75217001.47-0.10-0.101.561.47
15-Apr-204.50233971.47-0.10-0.101.561.47
21-Nov-201.75152001.52-0.10-0.111.611.52
15-May-215.75243991.56-0.10-0.121.651.56
15-Jul-225.75214001.65-0.09-0.161.731.65
21-Apr-235.50213001.73-0.09-0.151.831.73
21-Apr-242.75247001.81-0.08-0.161.911.81
21-Apr-253.25261001.87-0.07-0.161.961.87
21-Apr-264.25291001.91-0.07-0.171.991.91
21-Apr-274.75256001.95-0.06-0.182.041.95
21-Nov-272.75104002.00-0.06-0.182.082.00
21-May-282.2570002.05-0.05-0.202.122.05
21-Apr-293.25120002.10-0.05-0.192.172.10
21-Apr-334.50107002.29-0.01-0.202.332.26
21-Jun-352.7555502.45-0.01-0.212.482.43
21-Apr-373.7588002.49-0.01-0.212.522.46
21-Jun-393.2540002.57-0.01-0.222.602.55