September 2017 interest rate commentary

04 October 2017

Click here for monthly tables & chartsCASH

There were several changes to our list of cash account rates this month. Bankwest trimmed 5bps from its Smarter eSaver rate, CUA took 10bps off its eSaver Plus account, NAB reduced its iSaver rate by 15bps but Commonwealth Bank account increased its Goal Saver account rate by 25bps.

The month started with a flurry of reports but the last two weeks were fairly quiet.

Close Month
Cash Rate%   1.50
90d Bank Bill%   1.71   -0.01      1.74      1.71
Aust 3y Bond%*   2.18    0.15     2.28      1.96
Aust 10y Bond%*   2.87    0.16     2.93      2.55
Aust 20y  Bond%*   3.35    0.10     3.40     3.08
US 2y Bond%   1.48    0.16     1.48      1.26
US 10y Bond%   2.33    0.21     2.33      2.04
US 30y Bond%   2.86    0.13     2.87      2.66
iTraxx   73.0     2.4     73.0     64.0
$1AUD/US¢ 78.35   -1.11   81.25   78.00
* Implied yields from Dec 2017 futures

Second quarter GDP figures were not altogether impressive and the RBA left rates on hold at its September policy meetingANZ’s August job advertisement survey indicated demand for labour continued to grow but wage inflation is yet to flow through to the Melbourne Institute’s August Inflation Gauge. Retail sales figures, a significant component of total private consumption, was stagnant in July and with the household savings ratio down to around 4%, incomes will need to grow if consumers are to grow the cake larger. The July trade balance shrank as exports declined more than imports and home finance approvals provided some more evidence of slowing in the investor segment. NAB’s September survey indicated a drop in business confidence, albeit from a high base. The Westpac-Melbourne Institute consumer sentiment index edged a little higher but given the state of wages and salary inflation, not a lot was expected in this department. After August employment numbers came out bond yields jumped across the curve and the local currency rose against the USD. August new vehicle sales passed with little comment, the release of the minutes of the RBA September meeting provided nothing new and the Westpac-Melbourne Institute Leading Index slipped a little below trend but not enough to derail the interest rate rises which the market have been pencilled in for 2018. Towards the end of the month here was little in the way of domestic economic data apart from the August trade report and RBA loan figures for August.

The net result of all these reports on the cash market was for cash markets to increase the likelihood of future rates rises by the RBA. Cash futures implied the official rate is expected to remain unchanged at least until February 2018. February 2018 has been assigned a 1-in-4 of a rate rise by cash traders, May has been given a near-50% chance but a rate rise has been fully factored in for August. A second rate rise in November 2018 is viewed as a 38% chance while February 2019 currently has a 76% chance.

TERM DEPOSITS        Click here for monthly tables & charts

None of the major banks changed their term deposit rates.

Among the smaller deposit-taking institutions, the broadest range of rate changes came from Bank Australia as it sliced 10bps off rates on all terms from 3 months to 3 years.

Bank of Queensland’s changes were not quite as broad but they stood out all the same. Its 1 year rate was trimmed by 5bps, the 3 year rate was reduced by 10bps, its 9 month rate was cut by 15bps and its 3 month rate was slashed by 40bps. It did, however raise its 4 month rate by 25bps.

Other rate changes were more limited and mostly in the form of rate cuts. Newcastle Permanent cut its 1 year rate by 20bps and its 2 year and 3 year rates by 10bps. People’s Choice Credit Union 25bps off its 5 month and 6 month rates, reduced its 2 year and 5 year rates by 10bps and reduced its 4 year rate by 5bps. BankVic decreased its 2 year rate by 10bps, cut its 3 year rates by 15bps and trimmed its 4 year rate by 5bps.

Macquarie Bank was one of the few institutions to raise any term deposit rates as it added 5bps to rates on terms from 3 months to 1 year.

The 5 year rate offered by RaboDirect is the highest on offer in the survey at the end of September.

Click here for monthly tables & chartsBANK BILLS/SWAPS

Bank bill rates slipped a bit in September and by the end of the month both the physical bank bill rate and the 3 month BBSW rate had each lost 1bp to 1.71%.

Swap rates acted consistently with yields in general. The 1 year swap rate increased by 3bps to 1.85%, the 3 year rate rose by 8bps to 2.18%, the 5 year rose added 11bps to 2.58% and both the 10 year  and 15 year rates jumped 14bps to 2.99% and 3.21% respectively.

Swap spreads generally tightened but not in any dramatic sense. The 3 year swap spread tightened by 2bps from 5bps to 3bps, the 5 year spread slipped from 24bps to 23bps while the 10 year spread went in the other direction and widened by 1bp to 15bps.

Click here for monthly tables & chartsGOVERNMENT YIELD CURVE

3 and 10 year bond yields almost moved by the same amounts between the end of July and the end of August while 20 year yields lagged behind. The 3 year/10 year spread widened by 1bps to 69bps while the 3 year/20 year spread tightened by 5bps to finish at 117bps.

Click here for monthly tables & chartsGOVERNMENT BONDS

During September, bond yields rose in all advanced-economy markets. In Australia, yields on 3 year bonds increased by 15bps to finish at 2.18%, the 10 year bond yield increased by +16bps to 2.87% and the yield on 20 year bonds added 10bps to 3.35%. Australian bond yields lagged their U.S. counterparts’ increases and the Australia-U.S. 10 year spread tightened by 5bps to 54bps.

The month started with 10 year bond yields around 2.74% and then trended down for just over a week as investors sought low-risk assets, primarily because of geopolitical concerns, namely North Korea’s test of a thermo-nuclear device. Rumours emerged regarding ECB discussions of possible reductions, and eventually cessation, of bond purchases were largely overwhelmed, although yields did increase a little.

Yields then began to rise steadily for the next two weeks. Americans appear to be more confident in quitting their jobs. U.K yields then soared after a higher-than-expected consumer inflation reportAugust employment numbers got local yields running. However, it was the decidedly hawkish tone of the BoE’s statement which accompanied its monetary policy decision which really got the ball rolling. The BoE then reinforced the market’s attitude when the most dovish member of the MPC made a statement which included the phrase “we are approaching the moment when Bank Rate may need to rise.” Weak U.S. August retail sales were put down to Hurricane Harvey and thus the report was largely discounted.

The FOMC meeting reduced the expected result (no change) and delivered the well-flagged intention to reduce re-investment of bond maturities. From this point bond yields started to drift lower to 2.75%-2.80% until President Trump’s tax plan was released and U.S yields rose quickly (+7bps for 10 year bond yields), as did European yields. News of the candidacy of noted hawk Kevin Warsh for the post of next Fed chair then sent U.S. yields a few points higher right at the end of the month, despite weak August PCE figures.

In the U.S., the yield on 2 year bonds rose 16bps to 1.48% while 10 year bond yields added 21bps to 2.33%. In other major markets, Italian yields rose 7bps to 2.11%, French yields increased by 9bps to 0.74%, German yields increased by 10bps to 0.46% and in the U.K yields jumped 32bps to 1.36%.

Click here for monthly tables & chartsSEMI GOVERNMENT BONDS

Semi-government spreads were about 2.5bps tighter on average at the end of the month. Spreads were tighter pretty much across the whole curve and independent of issuer. A few short-dated lines were the obvious culprits but longer dated lines such as WATC October 2027s also found (relative) favour with investors.

The value of primary market transactions halved from $5.6 billion in August to around $2.7 billion in September. Unlike in August, QTC was present but did not feature prominently in September. That honour was left to WATC and its $1.4 billion issue of October 2026s.

Click here for monthly tables & chartsCORPORATE BONDS

Corporate bond spreads were 5bps tighter on average as a corporate bonds tended to rise less than their ACGB counterparts, especially at the short end. Swap spreads were also generally tighter but more so at the short end. The cost of insuring against bond default inched up and the iTraxx Australia Series 28 index finished September at 73.0, up from August’s 70.6 (but down around 6bps after adjusting for the estimated 9-10bps impact from the changeover from Series 27 to Series 28.)

In the primary markets local issuance came to about $18 billion in September compared to about $19 billion of bonds issued in August. Of this $18 billion, about $4.6 billion was attributable to asset-backed securities and residential mortgage backed securities, which was about the same as in August.

In the primary markets local issuance came to about $18 billion in September compared to about $19 billion of bonds issued in August. Of this $18 billion, about $4.6 billion was attributable to asset-backed securities and residential mortgage backed securities, which was about the same as in August.

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

Trading margins in this sector were higher on average and the median trading margin rose from 1.52% (after adjustments for removal of Goodman Notes and Caltex Notes) to 1.87% at the end of September. With fewer and fewer securities on issue, median margins tend be more volatile.

Note the large change in the trading margin of Suncorp Notes (ASX code: SUNPD) over the month. At the end of August its trading margin was a mere 50bps over BBSW. The 93bps rise really just brings it back into line with its peers, although some may argue it has “overshot”.

Click here for monthly tables & chartsASX-LISTED HYBRIDS

Trading margins in this sector were a little lower on average and the median trading margin slipped from 3.20% at the end of August to 3.13% at the end of September. Note any large changes in trading margins over the month may be the result of small price changes in securities which are close to maturity. Examples include Bendigo Bank CPS (ASX code: BENPD) and Bank of Queensland CPS (ASX code: BOQPD).

ANZ raised $930 million from its Capital Notes 5 (ASX code: ANZPH) issue. These securities began trading on the ASX at a 1.7% premium to face value.