May 2017 interest rate commentary

02 June 2017

Click here for monthly tables & chartsCASH

There were two changes to our list of cash account rates this month. Commonwealth Bank increased its Goal Saver Account by 10bps while Westpac trimmed its eSaver Plus account rate by 5bps for the second month in a row.

Close Month
Cash Rate%   1.50
90d Bank Bill%    1.74     0.00       1.75       1.74
Aust 3y Bond%*   1.67    -0.16      1.96      1.66
Aust 10y Bond%*   2.42    -0.19      2.75      2.40
Aust 20y  Bond%*   2.99    -0.19      3.31      2.99
US 2y Bond%   1.28     0.01       1.35       1.24
US 10y Bond%   2.21    -0.07      2.42      2.21
US 30y Bond%   2.86    -0.09      3.04      2.86
iTraxx  86.5      4.1      86.5     80.4
$1AUD/US¢ 74.31     -0.57    75.56    73.29
* Implied yields from June 2017 futures

May started off with a rise in the Melbourne Institute’s Inflation Gauge, so there is some chance the headline rate of consumer inflation will be higher when the next CPI figures are released in late July. The RBA board met and left the official cash rate unchanged at 1.50%, Australia racked up another trade surplus in the March quarter, the RBA’s quarterly Statement on Monetary Policy held no surprises, although there was a small shift in the GDP forecast for the year to June 2018.

NAB’s business survey and ANZ’s job advertisement survey came out, each adding to a picture of solid conditions in the Australian economy and a likelihood of further gains in employment in the near-term. March retail sales figures suggested consumers are saving more and spending less. The 2017 Federal Budget made quite an impression across the country, it had little effect on markets. Housing finance figures showed little sign of lower demand for housing credit. April New vehicle sales were almost flat and largely ignored by the market which were focussed on the minutes of the RBA May meeting. The Westpac-Melbourne Institute consumer sentiment figures were largely unchanged but the survey reported households are less worried about possible unemployment. Private sector wages have hit a new low and are now barely keeping up with CPI inflation. Labour force figures gave (most of) us a surprise which may or may not have something to do with the sampling process, but economists disagree in their interpretations of the data. Towards the end of the month the Westpac–Melbourne Institute Leading Index slipped a little while March quarter construction numbers were much as expected.

While none of the data was especially weak, there was a significant change in cash market prices. In April cash contracts implied some chance of the rate rise cycle beginning in mid-2018. At the end of May, those same contracts implied next-to-no chance of a rate rise in 2018. What’s more, 2017-dated contracts implied some chance of another rate cut.

TERM DEPOSITS        Click here for monthly tables & charts

Westpac adjusted all of its term deposit rates with a major 55bps cut to its 3 year rate. Rates on its other terms were increased or decreased by 5bps with the exceptions of 4 and 5 month terms which were both reduced by 10bps.

Among smaller deposit-taking institutions, quite a few rates were changed and about 80% of those changes were in the form of rate reductions.

BankSA, St George Bank and Bank of Melbourne are all Westpac subsidiaries and they all reduced rates on the same terms by the same 10bps-15bps amounts. However rate changes which really stood out was the 60bps reductions they each made to their 3 year terms.

Greater Building Society’s changes were similar in style. Rates on all its terms over 9 months were reduced by either 10bps or 20bps but then it also cut its 5 month rate by 45bps but increased it 6 month rate by 50bps.

Newcastle Permanent was the only institution to make changes to its rates only in the positive direction. 6 months and 1 year rates were increased by 20bps and its 3 month rate was increased by 10bps.

The 5 year rates offered by Greater Building Society and RaboDirect were the highest on offer in the survey at the end of May.

Click here for monthly tables & chartsBANK BILLS/SWAPS

Bank bill rates slipped early in the month and then were pretty much unmoved from then on. By the end of May, physical bank bill rates were steady at 1.74% while 3 month BBSW fell 1bps to 1.74%.

Swap rates fell considerably more at the long end of the curve this month to continue the flattening process which has been in process since March. The 1 year swap rate fell 6bps to 1.68%, the 3 year rate was 15bps lower at 1.84%, the 5 year fell 22bps to 2.21%, 10 year rates dropped 20bps to 2.67% and the 15 year rate fell 19bps to 2.91%.

In March and April yields were lower in most sectors of the bond market and this was true again in May. Swap rates generally kept pace with ACGB yields or made up for some of April’s slight lag. The 3 year swap spread widened 1bp from 19bps to 20bps, the 5 year spread tightened by 3bp to 29bps 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 dropped back to 75bps and the 3 year/20 year spread gave back April’s increase to finish 3bps tighter at 132bps. The front end of the curve moved closer to the official cash rate as rate moves by the RBA were discounted while the long end followed offshore yields lower.

Click here for monthly tables & chartsGOVERNMENT BONDS

Bond yields began the month by rising for the first week as the world’s financial markets focussed on the May meeting of the FOMC. Comments in the statement which was released after the meeting were viewed as mildly hawkish, but this did not stop yields from beginning to steadily fall. The “market-approved” French politician was elected and the lid was kept on European bond yields as the ECB’s stated it had no plans to cut back on its bond-purchasing habit.

The Australian budget dominated local market thinking for about a week as offshore markets went quiet and not long after S&P affirmed Australia’s AAA credit rating (with a negative outlook). It looks as if the Federal Government has bought itself some breathing space.

In the second half of the month, U.S data were somewhat on the soft side and President Trump then found new and innovative ways to create or be associated with political uncertainty, all of which was supportive of lower yields.

The net effect over the month, bond yields were lower in all major markets, except in the U.S. where yields at the front of the curve rose a little. In the U.S., the yield on 2 year bonds rose 1bp to 1.28% while 10 year bond yields fell 7bps. The U.S-Australia spread tightened by 12bps to 21bps as the local 10 year yield dropped quite a bit more than its U.S. counterpart. The Australian 10 year yield (implied by June futures) fell by 19bps to 2.42% while the 3 year yield was 16bps lower at 1.67%. The Australian-U.S. 10 year spread has hit a new low for this cycle during the month and the level of speculation about whether it would go negative increased.

In other major markets, 10 year bond yields were consistently lower, except in Japan where they are anchored close to zero as the Bank of Japan provides ongoing price support as part of their monetary policy. German yields inched 2bps down to 0.30%, U.K. yields fell 4bps to 1.05%, U.S yields were 7bps lower at 2.21%, Italian yields fell 10bps to 2.18% and French yields dropped 11bps to 0.72%.

Click here for monthly tables & chartsSEMI GOVERNMENT BONDS

Semi-government spreads were just under 1bp tighter on average, although spreads tended to widen as one went further out along the curve. There were one or two anomalies; the spread on WATC October 2018s tightened by 11bps and TCV November 2018s tightened by 9bps. WATC lines in general were favoured and spreads on these lines tightened across the whole curve.

In other news, the completion of the long-term lease of Endeavour Energy has led to an alteration in N.S.W. Treasury Corporation’s funding requirement for 2017/2018.

The Tasmanian government released its 2017/18 budget and it forecast a $54 million surplus. Deutsche Bank economist Phil Odonaghoe said he could see “few implications for Tasmania’s AA+/Stable credit rating (S&P) stemming from this Budget.”

QTC was the only state financing authority to issue bonds during the month.

Click here for monthly tables & chartsCORPORATE BONDS

Corporate bond spreads were 5bps tighter on average as most corporate bonds outpaced ACGB yields regardless of maturity date. Swap-to-bond spreads were mostly tighter as swap rates generally fell slightly more than ACGB yields, which is a continuation of April’s theme. In contrast, the general cost of insuring against bond default rose. The iTraxx Australia Series 27 index closed the month at 86.5, up from the April’s close of 82.4, which continued a lack of volatility which has been in place since late February.

In the primary markets local issuance was a multiple of the previous month’s $9.5 billion worth of bonds. $23 billion worth of bonds were issued and two multi-tranche transactions by NAB and ANZ in the USD market were the stand outs. ANZ issued USD$2 billion ($2.7 billion) worth of 3 year and 5 year bonds across four tranches and then a day later NAB issued USD$3.5 billion (AUD$4.7 billion), also across four tranches and also comprising 3 year and 5 year bonds.

It was another big month for RMBS and ABS issuance. In fact, in dollar terms it was quite a bit busier than April. ING IDOL ($1.17 billion), MyState Conquest ($400 million), AMP Progress ($1.3 billion), IMB Illawarra ($300 million), Bluestone Sapphire ($250 million) and ABS Volkswagen Driver ($466 million) all issued securities during the month.

The Kangaroo market was busier than in April, with about $3.2 billion worth of AUD-denominated bonds issued by foreign issuers but it still fell short of March’s $4.6 billion. As usual, most bonds came from regular issuers but there were also a few issuers which stood out. Caisse des Dépôts issued $500 million November 2027s which made it the largest single transaction along with Societe Generale’s $500 million May 2027s and a two tranche affair from the Asian development Bank. The transaction also appears to be Caisse des Dépôts debut in this market.

In ratings news, over twenty regional banks and ADIS were downgraded a notch by S&P. Despite initial thoughts the move may lead to wider spreads on securities issued by these institutions, it has had little effect so far.

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

 Trading margins in the ASX-listed notes sector fell with the median trading margin 23bps lower at 1.68%.

APA Pipeline Notes (ASX code: AQHHA, -122bps), Suncorp Notes (ASX code: SUNPD, -81bps) and Caltex Notes (ASX code: CTXHA, -57bps) were the main drivers while Westpac Notes (ASX code: WBCHA, +51bps) and AMP Notes (ASX code: AMPHA, +43bps) pushed in the upwards direction.  It seems as if S&P’s credit downgrade of regional banks and other ADIs has had little effect and any movements were more likely a function of being close to maturity

Click here for monthly tables & chartsASX-LISTED HYBRIDS

Trading margins in this sector were lower again on average at the end of May. The median trading margin fell from 3.36% (adjusted for IAGPC) to 3.19% over the month. There was some speculation of potential forced selling as a result of S&P’s downgrade of bank hybrids but, as readers will see from the diagrams below, lower credit ratings did not stop trading margins from falling.

In other news, Suncorp Capital Notes (ASX code: SUNPF) began trading on Monday (8 May 2017).