April 2017 interest rate commentary

05 May 2017

Click here for monthly tables & chartsCASH

There was just the one change to our list of cash account rates this month. CUA trimmed its eSaver Plus account rate by 5bps.

Close Month
Cash Rate%   1.50
90d Bank Bill%    1.74    -0.06       1.80       1.74
Aust 3y Bond%*   1.83    -0.12      1.97      1.75
Aust 10y Bond%*   2.61    -0.13      2.75      2.46
Aust 20y  Bond%*   3.18    -0.09      3.26      3.06
US 2y Bond%   1.27     0.01       1.29       1.16
US 10y Bond%   2.28    -0.10      2.38      2.17
US 30y Bond%   2.95    -0.06      3.01      2.84
iTraxx  82.4      -2.1      90.1     81.9
$1AUD/US¢ 74.88     -1.42    76.41    74.40
* Implied yields from Mar 2017 futures

The Melbourne Institute’s Inflation Gauge indicated headline inflation is likely to be higher in the first quarter while employment is also likely to be higher if ANZ’s job advertisement series lives up to its reputation. Dwelling approval numbers were again stronger than expected while February retail sales suggest Australian shoppers decided to spend less except on a few luxuries such as food. Housing finance figures indicated overall lending growth rates fell, albeit from a high base. NAB’s business survey painted a rosy picture for Australian business in the short term (so long as they are not in in the retail sector). Westpac’s consumer survey suggested consumers are wary but not glum while March employment figures were terrific, although doubts remain as to the figures’ reliability. April consumer inflation expectations rose to 4.1% but they are typically biased to the upside. The RBA’s April minutes and the Westpac-Melbourne Institute Leading Index report both had little impact on financial markets. NAB’s business survey for the March quarter confirmed what was already known from its monthly survey. March quarter CPI figures were under expectations but offset by the pace of credit growth among both owner occupiers and investors. Export prices have outstripped import prices again in the March quarter which bodes well for Q1 GDP.

The contradictory pressures on interest rate policy have led cash market prices to levels which suggest the rate-rises will not be required until the latter part of 2018. The odds of a rate cut in 2017 lengthened marginally but the reality is there is very little chance of a change in Australia’s official interest rate during this year. May 2018 is currently the first month with any credibility of a possible rate change and even then, prices indicate only a 22% probability for such an event. The probability of a rate rise increases as 2018 progresses and the chance of rate by August 2018 is just under 50%.

TERM DEPOSITS        Click here for monthly tables & charts

In the second week of April Commonwealth made quite a few changes and they were all reductions. 1 month and 2 month rates were cut by 40bps and 25bps respectively while its 3 year rate was slashed by 70bps. 4, 5, 6 month rates were lowered by 15bps while the 9 month rate was reduced by 10bps.

Among smaller deposit-taking institutions, relatively few rates were changed and, of those which were, there was a small bias towards lower rates.

QT Mutual was the exception and all of its changes were in the form of rate increases. Its 4 month rate was raised by 25bps, its 9 month rate by 35bps and its 5 month rate by 45bps and there were some more modest increases on its other rates.

Greater Building went a bit each way. It reduced rates on 5, 6 and 9 month terms by 10bps and its 4 month rate was cut by 20bps, while rates on both 3 month and 2 year terms were increased by 40bps.

Other changes worthy of note came from BoQ and BoQ Specialist which both reduced their 3 year rates by 20bps. BankVic also reduced its 3 year rate but by 15bps, while it also cut its 2 year rate by 35bps and Newcastle Permanent increased its 2 year rates by 10bps, its 3 year rate jumped by 20bps but its 5 year rate fell by 10bps.

Greater Building Society’s 5 year rate is the highest on offer in the survey.

Click here for monthly tables & chartsBANK BILLS/SWAPS

Bank bill rates starting to drift down early in the month and continued in that fashion until around mid-month when they then stabilised. By the end of April, physical bank bill rates fell 6bps to 1.74% while 3 month BBSW fell 5bps to 1.75%.

Swap rates fell across the curve this month to produce a mildly flatter swap curve as long end rates fell a bit more than rates at the other end. The 1 year swap rate fell 7bps to 1.74%, the 3 year rate was 9bps lower at 1.99%, both 5 year and 10 year rates dropped 10bps to 2.43 and 2.87% and the 15 year rate fell 11bps to 3.10% respectively.

April was a repeat of March in the sense yields were lower in most sectors of the bond market. It was also a repeat in the swaps market where they lagged behind their Commonwealth counterparts again. The 3 year swap spread increased from 18bps to 19bps, the 5 year spread widened by 3bp to 32bps and the 10 year spread widened from 29bps to 30bps.

Click here for monthly tables & chartsGOVERNMENT YIELD CURVE

Over the month, the 3 year/10 year spread was maintained at 78bps whereas the 3 year/20 year spread widened by 3bps to 135bps. The general consensus is the RBA will not move until mid-to-late 2018 and so the front end of the curve is viewed as being anchored at around the current yield. The long end is driven by U.S. yields and thus the gradient of the curve will largely be determined by offshore events.

Click here for monthly tables & chartsGOVERNMENT BONDS

Bond yields began to fall from the start of the month. Markets were prone to the old “flight-to-safety” theme which arises whenever the US military is let off its leash. On top of this followed the prospect of less-steep official rate rises in the US as tighter monetary policy is partially-instituted by the U.S. Fed. The minutes from the Fed’s March meeting indicated it is planning to reduce its future demand for Treasury bonds via the cessation of re-investment of bonds and RMBS which have matured.

Then came the politics; the possibility of conflict with a nuclearised North Korea and French presidential elections which may lead to the breakup of Euroland. Economic issues such as the likelihood of U.S. tax cuts and lower-than-expected U.S. March CPI figures all led to a debate over the rate of growth in the U.S. all of these were favourable to lower yields and the relative safety of government bonds.

Around mid-month, or just after Easter, the first-round outcome of the French presidential election flicked the “risk on” switch. Yields started to rise, even after mediocre CPI figures and a Trump tax plan which proved to be a non-event. The ECB and BoJ did nothing at their policy meetings towards the end of the month and US Q1 GDP figures were disappointing. Yields still tended to go higher and the rationale behind it were the some wage figures released with the GDP numbers suggested a tighter U.S. labour market may be on the brink of producing wage inflation.

The net effect over the month was a modest fall in bond yields in the US and, consequently, lower Australian yields. In the U.S., the yield on 2 year bonds rose 1bp to 1.27% while 10 year bond yields fell 10bps. The U.S-Australia spread tightened by 2bps to 33bps as the local 10 year yield dropped a little further than its U.S. counterpart.  The Australian 10 year yield implied by June futures fell by 13bps to 2.61% while the 3 year yield was 12bps lower at 1.83%. While the Australian 10 year yield has been below that of the U.S. in the past, the spread hit a new low for this cycle during the month. Some commentators suggested if the spread gets any lower, Australian bonds may start to be viewed as safe haven assets.

In other markets, 10 year bond yields were typically lower, except in the Japanese market where the BoJ has the 10 year bond yield tethered to zero and Italy, where bond yields do as they please. In the U.K. the 10 year bond yield fell 5bps to 1.08%, in Germany it edged down 1bp to 0.32%. In France the yield dropped 12bps to 0.84%.

Click here for monthly tables & chartsSEMI GOVERNMENT BONDS

Semi-government spreads were just over 1.5bps wider on average, although spreads expanded more as one went further out along the curve. There were one or two anomalies; the spread on WATC October 2018s tightened by 10bps and TCV November 2018s tightened by 7bps. These were not the only lines with tighter spreads but on the whole, spreads widened.

In the primary market WATC issued an additional $1 billion of its July 2024 benchmark series while QTC added to its two existing August 2027s and July 2028s lines by issuing $295 million 2027s and $205 million 2028s. Apart from these transactions, QTC continued to nibble away at its Commonwealth Government-guaranteed June 2019s with a $17 million switch to a similar-dated unguaranteed line.

Click here for monthly tables & chartsCORPORATE BONDS

Corporate bond spreads on average were essentially unchanged over the month. However, this stability was somewhat of a façade. Spreads on corporate bonds with maturities from 2019 and onwards widened while spreads on bonds with maturities in 2017 and 2018 tightened. Tighter spreads on short-dated bonds issued by major banks were especially noticeable.

Swap-to-bond spreads were all wider as swap yields rose more than ACGB yields, indicating the banking sector viewed corporates as slightly riskier than they did at the end of March. On the other hand, the general cost of insuring against bond default fell. The iTraxx Australia Series 27 index closed the month at 82.4, down from the March’s close of 84.5.

In the primary markets local issuance was well down on the previous month and only $9.5 billion worth of bonds were sold as compared to March’s $24 billion. Easter appears to have had some effect as issuance dried up in the week prior to it. Apart from the usual banks issuers, there were some interesting non-bank corporate transactions. Among them was Telstra and its bond issue was among the larger ones, which is understandable given the size of the telco. Other transactions were typically between $100 million and $200 million although there were some smaller transactions from unrated issuers such as IMF Bentham and

Centuria Capital issued $100 million of notes. It is good to see the local corporate bond market expand, even if it is in a small way.

Property trusts were active. QIC Shopping Centre Funds raised USD$200 million ($AUD266 million) in two tranches of 10 and 12 year bonds. Investa Commercial Property Fund issued $100 million April 2027 green bonds where the proceeds will be used for green purposes, Vicinity Centres raised $200 million and Dexus Finance issued $130 million May 2027s.

Seek issued $175 million April 2022 FRNs, Treasury Wine’s bond issue comprised USD$100 million (AUD$133 million) 10 year bonds and USD$50 million (AUD$67 million) 12 year bonds while Cola Amatil issued $100 million April 2024s just before a profit downgrade.

It was a big month for RMBS issuance. People’s Choice Light Trust No.6 returned after an absence of 18 months to issue $500 million worth via multiple tranches. Resimac Premier 2017-1 issued approximately $1 billion worth of RMBS, including two USD tranches worth a combined USD$400 million (AUD$533 million).

The Kangaroo market was quiet with about $2.5 billion dollar worth of bonds issued, well down on March’s $4.6 billion. Most bonds came from regular issuers but there were also two issuers which stood out because of the relative size of their transactions.  Wells Fargo had a three tranche affair of fixed and floating tranches for a total of $1.2 billion and Goldman Sachs issued $500 million worth of fixed and floating bonds.

In ratings news, Alumina was upgraded by S&P from BB to BB+, which so still short of the BBB- status which grants the issuer “investment grade” status. Moody’s revised Scentre Group’s outlook to negative and Woodside had its negative outlook removed by S&P.

Click here for monthly tables & chartsASX-LISTED FLOATING RATE NOTES AND BONDS

Trading margins in the ASX-listed notes sector increased and the median trading margin rose by 16bps to 1.91%. ANZ Notes (ASX code: ANZHA) and NAB Notes (ASX code: NABHB) are both close to maturity and small changes in their prices have produced large changes in their respective trading margins.

In other news, Villa World’s new floating rate notes (ASX code: VWDHA) began trading on the ASX on 24 April and they opened at a small premium to their face value.  Crown continued its buy back of its series 1 notes (ASX code: CWNHA) and just over 125,000 of 4.2 million notes have been purchased so far.

Click here for monthly tables & chartsASX-LISTED HYBRIDS

Trading margins in this sector were slightly lower on average by the end of April and the median trading margin fell from 3.41% to 3.34% over the month.

The diagrams below show how demand for and supply of hybrids was mixed, not only across issuers but within issuers as well. ANZ CPS (ASX code: ANZPC) is close to maturity and so the change in its trading margin is more a symptom of undisciplined buying than anything particularly meaningful. Likewise, it appears as if some sellers of Bendigo CPS 3 (ASX code: BENPD) got a little anxious to exit.

In other news, Challenger’s new series 2 notes (ASX code: CGFPB) began trading on 10 April 2017.