27 Jun – 01 Jul 2016

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Australian bonds past 3 years moved lower during the week as the yield curve flattened once again. The move lower is being driven from offshore, as uncertainty rages post the Brexit vote. 3 year bonds were 1bp higher at 1.46% but 10 year bonds fell 6bps to 1.96% and 20 year bonds fell by the same amount to 2.51%. The 10 year close is a new closing record low. There was little in the way of new economic data; the RBA was quiet, the Treasurer was quiet (about markets), in fact, everyone had lots of nothing to say. Any news there was came from offshore and even then it was fairly sparse. The impending Australian election was not seen as providing too much volatility as the result was looking like a returned government [Stop Press: this has clearly changed and now the likelihood of a hung parliament exists].

European investors were buying US treasury bonds and keeping downward pressure on US yields. They did so in anticipation of a higher US dollar and with the added bonus of an increasingly rare positive yield. Most European sovereign debt offers a negative yield so anything positive is perceived as a no-brainer as long as the currency risk is acceptable.

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Investors seem to be ignoring positive economic news out the US which would normally place upwards pressure on yields. Given the scarcity of places to invest, the negative yield dilemma in Europe and Japan, it has a certain logic to it.  US Q1 GDP was revised up, US consumer sentiment figures were positive and core PCE figures were stable and therefore did not add additional weight to the rate delay camp’s argument. At the end of the week, US markets are placing no chance of a rate cut in July and a 6% chance of a September hike.

This week there was a bit of change in Commonwealth Government fund raising and there were the standard two bond issues but instead of a Treasury notes tender there was an index-linked bond (“ILB”) tender. $600 million May 2021s and $1 billion November 2027s were sold with coverage ratios of 4.1833 and 2.2655 respectively, while the February 2022 ILB had a coverage ratio of 1.7333.

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-176.00118281.610.04-0.061.611.56
21-Jul-174.25189001.590.05-0.081.591.53
21-Jan-185.50205001.550.01-0.081.591.55
21-Oct-183.25181001.560.02-0.061.581.56
15-Mar-195.25229471.530.02-0.061.551.53
21-Oct-192.75217001.520.02-0.091.551.52
15-Apr-204.50233971.520.02-0.121.551.52
21-Nov-201.75152001.570.00-0.161.611.57
15-May-215.75243991.610.00-0.171.661.61
15-Jul-225.75214001.71-0.02-0.211.771.71
21-Apr-235.50213001.78-0.03-0.231.861.78
21-Apr-242.75247001.87-0.04-0.261.961.87
21-Apr-253.25261001.92-0.05-0.292.011.92
21-Apr-264.25291001.95-0.06-0.302.051.95
21-Apr-274.75256002.00-0.06-0.322.102.00
21-Nov-272.75104002.05-0.06-0.322.152.05
21-May-282.2570002.12-0.06-0.322.222.12
21-Apr-293.25120002.17-0.06-0.332.272.17
21-Apr-334.50107002.34-0.07-0.352.462.34
21-Jun-352.7555502.49-0.08-0.382.622.49
21-Apr-373.7588002.54-0.07-0.372.662.54
21-Jun-393.2540002.65-0.07-0.372.762.65