September, 2023
Australian sovereign bond yields surged across the yield curve with a steepening bias over September, along with the US where market participants priced in concerns that the Federal Reserve will keep rates higher for longer. Australian 3-year Government bond yields rose 34bps, ending the month at 4.08% while the 10-year Government bond yields surged 46bps to end the month at 4.49%. The spread between the Australian 10-year Government bonds and their US equivalents ended the month unchanged at -8bps from the previous month. Credit spreads tightened (Bloomberg AusBond Credit 0+ index tightened from 115bps to 113bps). The Bloomberg AusBond Composite 0+ year Index returned -1.53%.
In September, the RBA left the official cash rate target unchanged at 4.10% for the third consecutive time, while also keeping the justification that further time will allow the Board to examine the impact of the cumulative rate hikes. This decision was largely in-line with the economists’ consensus and the implied rate priced-in by market participants. In terms of domestic inflation, there was little amendments in the wording and the statement re-confirmed the still too high inflation. As for the labour market, the Board slightly changed the comments to a softer tone to “tight” labour market instead of a “very tight” one. Regarding the economic prospect, the statement pointed out the “increased uncertainty around the outlook for the Chinese economy due to ongoing stresses in the property market.” Concerning forward guidance, the Board repeated that “some further tightening of monetary policy may be required” and reiterated data dependency. Later in the month, the Minutes of the RBA’s August Board meeting stated the recent data were “consistent with inflation returning to target within a reasonable timeframe”.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/ubs_aust_bond-2-1.pdfAugust, 2023
Australian sovereign bond yields fell over August as investors started to price-in a lower terminal rate given gradually declining domestic inflation. In contrast, US sovereign bond yields rose with a steepening bias amid a repricing of policy rate expectations for next year due to a continuously resilient economy. Australian 3-year Government bond yields fell -13bps, ending the month at 3.74% while the 10-year Government bond yields declined -3bps to end the month at 4.03%. Australian 10-year Government bonds outperformed US equivalents with the spread ending the month at -8bps from +10bps the previous month. Credit spreads also tightened (Bloomberg AusBond Credit 0+ index tightened from 125bps to 115bps). The Bloomberg AusBond Composite 0+ year Index returned 0.74%.
In August, the RBA left the official cash rate target unchanged at 4.10% at the second consecutive time, citing again the need to provide the Board with further time to access the economic environment. This decision was against the narrow consensus amongst economists of a 25bps rate hike although largely in-line with the implied rate priced-in by market participants. In terms of domestic inflation, the Board changed its wording from “inflation has passed its peak” to further stating that inflation is “declining”. The Board also noted the services inflation to be “rising briskly” and acknowledged the possibility that “surprisingly persistent” services inflation overseas “could occur in Australia” as well. In terms of the labour market, there were no material changes to the expression that the “condition in the labour market remain very tight, although they have eased a little”.
Regarding forward guidance, the Board kept saying “some further tightening of monetary policy may be required” and reiterated data dependency. Later in the month, the Minutes of the RBA’s August Board meeting stated that “inflation was heading in the right direction” showing some sort of satisfaction by the Board.
Elsewhere, the domestic economic data was mostly weaker over the month. The labour market showed some cooling as the unemployment rate rose to 3.7% and surprised the market consensus of 3.6%. The monthly change in employment also turned into negative territory to -14.6k. while the participation rate slightly declined to 66.7% from 66.8% the previous month. The inflation data was again encouraging as the monthly July CPI release came in softer printing 4.9%, a further decline from the previous month’s 5.4% and below the consensus of 5.2%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/ubs_aust_bond-1-1.pdfJuly, 2023
Australia’s sovereign yield curve steepened over July with the front end declining and the long end rising in-line with the offshore bond markets due to some signs of cooling core inflation in both the US and Australia. Australian 3-year Government bond yields fell -18bps, ending the month at 3.87% while the 10-year Government bond yields increased 4bps to end the month at 4.06%. Australian 10-year Government bonds outperformed US equivalents with the spread ending the month at 10bps from 18bps the previous month. Credit spreads tightened (Bloomberg AusBond Credit 0+ index tightened from 127bps to 125bps). The Bloomberg AusBond Composite 0+ year Index returned 0.52%. In early July, the RBA left the official cash rate target unchanged at 4.10%, citing the need to provide the Board with more time to assess the economic situation.
Market pricing prior to the meeting implied slightly less than a 50/50 probability of a 25bp change in the policy rate. In terms of inflation, the Board didn’t change the wording that “inflation in Australia has passed its peak” and that it is “still too high”, although adding a dovish tone that “monthly CPI indictor for May showed a further decline”. As for forward guidance, the Board kept its wording that “some further tightening of monetary policy may be required” and reiterated data dependency. Later in the month, the Minutes of the RBA’s July Board meeting showed the Board considered two options: to hold the cash rate steady or hike by 25bps. It noted the former case is the stronger one on the grounds of “uncertainly around the outlook and the significant increase in interest rates to date”. In contrast, although the RBA delivered a 25bps rate hike at the June meeting, the Minutes noted the two options were “finely balanced” and that there was “considerable uncertainty regarding the outlook”.
The domestic economic data over July was mixed. In the same manner as last month, the labour market showed little signs of easing as the unemployment rate declined to 3.5% and surprised the market consensus of 3.6%.
Employment change was stronger than the market had expected too – reconfirming a still resilient labour market.
The monthly and quarterly CPI prints, however, showed some additional cooling. The monthly June CPI was in line with market expectation printing 5.4%, declining from 5.6% the previous month. Later in the month Q2 CPI release came in softer, with headline inflation coming down to 0.8% QoQ from 1.4% the previous quarter, and the trimmed mean core CPI at 0.9% QoQ from 1.2% in Q1 versus the consensus of 1.1%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/ubs_aust_bond-10.pdfJune, 2023
Australian Government bonds sold-off sharply over June in-line with offshore bond markets due to persisting concerns over sticky core-inflation and a still resilient economy in the US. Australian 3-year Government bond yields rose 68bps, ending the month at 4.05% while the 10-year Government bond yields rose 42bps to end the month at 4.02%. Australian 10-year Government bonds underperformed US equivalents with the spread ending the month at 18bps from -4bps the previous month.
Credit spreads tightened (Bloomberg AusBond Credit 0+ index tightened from 135bps to 127bps). The Bloomberg AusBond Composite 0+ year Index returned -1.95%.
In early June, the RBA raised the official cash rate target by 25bps, another surprising rate hike against the consensus and market expectation which only priced in 8bps of tightening prior to the meeting. 20 out of 30 economists surveyed by Bloomberg predicted a pause for this meeting. The RBA’s main reasoning for this surprising rate hike was to “provide greater confidence that inflation will return to target”. The RBA was mainly concerned over the stubborn services inflation and the rising unit labour costs. In fact, the April monthly Consumer Price Index was stronger than expected printing 6.8% YoY from 6.3% prior. In terms of forward guidance, there was no major changes in the language that “some further tightening of monetary policy may be required”.
Elsewhere on the domestic economic data front, the Australian Bureau of Statistics unveiled its latest quarterly GDP statistics which was softer than expected (Q1 SA 0.2% QoQ vs C 0.3%). GDP per capita fell 0.2%, the first contraction since December 2018 if one excludes the periods affected by COVID-19. Household spending also continued slowing as it rose 0.2%, the weakest quarterly result since the decline recorded during the COVID-19 Delta-variant lockdowns in September 2021. The remaining domestic economic data series were mixed. The labour market showed little signs of easing as the unemployment rate declined again to 3.6% while the participation rate increased to 66.9% from 66.7% the previous month. The monthly May CPI, however, surprised the market to the downside printing 5.6% compared with the consensus of 6.1%, declining from 6.8% the previous month.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/ubs_aust_bond-9.pdfMay, 2023
Australian Government bond yields rose modestly across the term structure.
Australian credit spreads tightened over the month.
The RBA raised the cash rate target by 25bps in May.
Global markets wrestled with the dichotomies of continued strength in services versus weakness in factory activity, as well as receding US recession risk occurring alongside a loss of economic momentum in China. The yield on the 2-year US Treasury started the month at 4.01% and ended 39 basis points higher at 4.40%. The yield on the 10-year US Treasury ended April at 3.42% and stood 22 basis points higher at 3.64% at the end of May.
In the US, economic resilience continued in May, particularly in the labour market. The US non-farm payrolls report showed job growth exceeded economists’ expectations for the 13th consecutive reading, with a pickup in wage growth and the unemployment rate dipping to the lowest level since the late 1960s. Price pressures remain high, with both core CPI and core PCE inflation well above 2% and failing to meaningfully decelerate in recent readings (on a three-month annualized basis). The Senior Loan Officer Survey pointed to a modest tightening in credit conditions in the aftermath of regional bank stress earlier in the year. Importantly, institutions cited concerns over the economic backdrop as the cause of tighter conditions, rather than concerns about ability to access liquidity or capital adequacy. The White House and Republican House Speaker came to an agreement to raise the US debt limit through Jan. 1, 2025. This deal involves to a modest amount of fiscal drag in the coming years, but significantly reduces near-term economic and financial left-tail risk. In early May, the Federal Reserve delivered a 25 basis point interest rate increase.
In Europe, the composite PMI edged lower from April to May, as did investor sentiment. Industrial production more than offset February’s larger than expected increase with a bigger than expected decline in March. Retail sales declined for the second consecutive month. Revised data showed that Germany’s economy contracted in back-to-back quarters through Q1. The European Central Bank’s bank lending survey showed a further tightening in credit conditions, with corporate loan demand slumping due to high interest rates. In early May, the European Central Bank delivered a 25 basis point hike. President Christine Lagarde signalled that the central bank had not yet reached a sufficiently restrictive policy stance, and that more policy tightening would be in the offering. In the UK, the Bank of England hiked rates by 25 basis points, citing risks to inflation that were still skewed significantly to the upside, and no longer anticipates that the economy will fall into recession in the near-term. Wage growth remains elevated, and employment grew by more than anticipated in the three-month period ending in March.
In Japan, preliminary manufacturing and services PMIs came in above 50 for May. Capital spending rose 11% year-on-year as of Q1, far surpassing expectations for a 6% rise. Services inflation, which has been 0.5% or lower throughout the history of the series (excluding the impact of tax increases), is currently running at 1.7% year-on-year as of April.
In China, concerns about the vigour of China’s economic recovery mounted amid a slate of data affirming a material loss of momentum. Growth in industrial production of 5.6% year-on-year for April was quite weak, considering the Shanghai lockdown one year ago. The youth unemployment rate was over 20% in April, the highest in series history (going back to 2018). Activity in the property market has been weakening since the start of April. Sluggish imports underscored concerns about industrial activity going forward. Purchasing managers’ indexes painted a more mixed picture, with the CFLP Manufacturing PMI at 48.8 and the Caixin Manufacturing PMI at 50.9 in May.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/ubs_aust_bond-8.pdfApril, 2023
Australian Government bonds remained largely flat over April in-line with offshore bond markets as concerns over the US banking sector became less acute with equities rising and market volatility subsiding. Australian 3-year Government bond yields rose only 6bps, ending the month at 3.00% while the 10-year Government bond yield ended the month at 3.34% just 4bps higher. Australian 10-year Government bonds underperformed US equivalents with the spread ending the month at -9bps from -17bps the previous month. Credit spreads tightened slightly (Bloomberg AusBond Credit 0+ index tightened from 148bps to 143bps). The Bloomberg AusBond Composite 0+ year returned 0.19%.
Global markets calmed in April after March’s bout of concern over the health of US regional banks and European financial institutions abated. Government bond markets were relatively stable in April. The yield on the 2-year US Treasury started the month at 4.06% and ended just 5 basis points higher at 4.11%. The yield on the 10-year US Treasury ended March at 3.49% and stood only 3 basis points higher at 3.52% at the end of April. The total return on the Bloomberg US Treasury index was 0.5%. The Bloomberg Pan-European Aggregate index returned 0.3%. US high yield bonds returned 1% and Euro high yield 0.5%.
File:March, 2023
Australian Government bonds rallied over March in-line with offshore bond markets as concerns over the banking sector mounted and markets quickly priced in rate cuts within this year primarily in the US. Australian 3-year Government bond yields declined 66bps, ending the month at 2.94% while the 10-year Government bond yields fell 55bps, to end the month at 3.30%. Australian 10-year Government bonds outperformed US equivalents with the spread ending the month at -17bps from -7bps the previous month. Credit spreads widened over the month (Bloomberg AusBond Credit 0+ index widened from 131bps to 148bps). The Bloomberg AusBond Composite 0+ year returned 3.16%.
In early March the RBA raised the official cash rate target by 25bps in-line with market consensus, the 10th consecutive hike to a level of 3.60%. Yields declined after the meeting as the market primality focused on the dovish language in the statement. The statement clearly stated that “monthly CPI indicator suggests that inflation has peaked in Australia”, and that there is “lower risk of a cycle in which prices and wages chase one another”. In terms of forward guidance, the statement amended “further increases” in the February statement to “further tightening” and refrained from using plural. The RBA would also assess “when” and how much further tightening is needed, implying a possible pause – which was delivered in the April meeting.
On the economic data front, the Australian Bureau of Statistics unveiled its latest quarterly GDP statistics which was softer than expected (Q4 SA 0.5% QoQ vs C 0.8%). GDP growth slowed in each of the last two quarters, and the 0.3% growth in household spending was the weakest quarterly rise since the delta-variant lookdowns in September 2021. Later in the month, the February labour force survey showed continuous tightness in the labour market. The unemployment rate fell again to 3.5% versus the consensus of 3.6%, still at historically low level. In terms of the monthly CPI series, inflation surprised to the downside in January at 7.4% YoY versus the consensus of 8.1%. The February CPI of 6.8% YoY was also below the consensus of 7.2%, mainly driven by a sharp decline in travel and accommodation prices, strengthening the view of market participants that inflation has peaked in Australia.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/ubs_aust_bond-7.pdfFebruary, 2023
Australian Government bonds sold-off over February in-line with offshore bond markets against the backdrop of markets once more pricing in higher future policy rates due to unexpectedly strong US economic data. Australian 3-year Government bond yields rose 42bps, ending the month at 3.60% while the 10-year Government bond yields surged 30bps, to end the month at 3.85%. The spread of Australian 10-year Government bond yields against US 10-year Government bond yields turned negative again, ending the month at -7bps. Credit spreads tightened over the month (Bloomberg AusBond Credit 0+ year index tightened from 136bps to 131bps). The Bloomberg AusBond Composite 0+ year returned -1.32%.
In early February the RBA raised the official cash rate target by 25bps, the 9th consecutive hike to a level of 3.35%. The RBA’s reasoning for the decision was largely focusing on the persistence of high inflation. Notably, the decision came shortly after the Q4 CPI release which surprised forecasters to the upside with the RBA’s preferred core inflation measure – the Trimmed Mean Index – rising 1.7% QoQ (6.9% YoY). According to the RBA minutes, the board considered two options of hiking 50bps and 25bps, which was deemed to be hawkish given that in the last meeting the discussion covered the possibility of pausing rate hikes altogether. The forward guidance was seen as hawkish too as the statement emphasized “further increase in interest rate will be needed”, excluding the phrase from the Dec. meeting that “it is not on a pre-set course”.
Elsewhere on the data side, labour market and wages releases came in weaker than expected in February. The labour force survey showed that the unemployment rate unexpectedly increased to 3.7% in January versus the market expectation to hold steady at 3.5%, although still at a historically tight level. Wage growth also came in softer than expected in Q4 at 0.8% QoQ (3.3% YoY) versus expectations of 1.0% QoQ. Retail sales on the other hand rose to 1.90% later in the month, partially recovering the large contraction reported in December.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/ubs_aust_bond-6.pdfJanuary, 2023
Australian Government bonds rallied over January in-line with offshore bond markets as markets priced in lower future policy rates given the backdrop of slowing US inflation. Australian 3-year Government bond yields declined 32bps, ending the month at 3.18% while the 10-year Government bond yield fell 50bps, to end the month at 3.55%. The spread of Australian 10-year Government bond yield against US 10-year Government bond yield narrowed, ending the month at 4bps. Credit spreads tightened over the month (Bloomberg AusBond Credit 0+ year index tightened from 149bps to 136bps). The Bloomberg AusBond Composite 0+ year returned 2.76% in January.
The domestic economic data were mixed over January. Housing-related indicators such as building approvals (-9.0% MoM) and new home loans (-3.7% MoM) continued to show the effects of the RBA policy tightening. November retail sales on the other hand, surprised to the upside (1.4% MoM versus the consensus of 0.6%), although the weakness in December retail sales (-3.9% MoM) revealed later in the month suggests that Black Friday sales is creating seasonal distortions. Around mid-month, weaker than expected labour data pushed down the Australian sovereign yield curve as the 10-year Government bond yield declined by 23bps to 3.32% on the same day. Monthly jobs growth fell abruptly to - 14,600 against the consensus of 25,000, signaling an easing domestic labour market. The unemployment rate worsened to 3.5% compared with a consensus of 3.4%, although still at a historically tight level. Adding to the market volatility, the Q4 CPI release surged to 1.9% QoQ (7.8% YoY), the highest annual CPI print since 1990, versus the consensus of only 1.60% MoM. In term of contribution to change, Recreation and culture was the main driver of the upside surprise. The Australian bonds sold-off with a curve flattening bias the same day.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/ubs_aust_bond-5.pdfDecember, 2022
Trading in the US bond market was less volatile than equities in December, with the yield on the 2-year US Treasury rising only 3 basis points over the month to 4.35%. The yield on the 10-year US Treasury rose around 10 basis points to 3.76%. In the US, the Fed raised interest rates by 50bps on 14 December, taking the federal funds rate target range to 4.25- 4.5%. The “dot plot,” which indicates expectations of FOMC members for the future path of interest rates, showed 17 of the 19 dots above 5% at the end of 2023. The ISM Manufacturing PMI fell to 49, below the neutral reading of 50 and the lowest level since the start of the current expansion, which began in May 2020. Consumer spending has been resilient, despite the impact of higher prices on household budgets. In recent months, the savings rate has fallen to just over 2%, near its record low, as households use their credit cards to help maintain spending. Consumers have been supported by the strong labour market. Nonfarm payrolls increased by 263,000 in November, the smallest gain since April 2021 but still well above historical norms. Inflation has been slowing in recent months, with CPI rising by only 0.1% month-over-month in November.
The Australian sovereign yield curve sold-off over December in-line with offshore bond markets largely due to the Bank of Japan’s adjustment of its YCC program and concerns over inflationary pressure as China ditched its Zero-Covid measures. Australian 3-year Government bond yields rose 34bps, ending the month at 3.50% while the 10-year Government bond yield increased by 52bps, to end the month at 4.05%. The spread of Australian 10-year Government bond yield against US 10-year Government bond yields – which was inverted at the end of November - turned positive, ending the month at +17bps. Credit spreads tightened over the month (Bloomberg AusBond Credit 0+ year index tightened from 156bps to 149bps). The Bloomberg AusBond Composite 0+ year returned -2.06% in December.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/ubs_aust_bond-4.pdfNovember, 2022
Australian sovereign bond yields fell over November as investors remained concerned about the growth outlook. Australian 3-year Government bond yields fell 13bps, ending the month at 3.16% while the 10-year Government bond yield fell 23bps, to end the month at 3.53%. The spread of Australian 10-year Government Bond yields against US 10-year Government bond yields ended the month inverted at -8bps. Credit spreads tightened over the month (Bloomberg AusBond Credit 0+ year index tightened from 169bps to 156bps). The Bloomberg AusBond Composite 0+ year index returned 1.55% in November.
In early November, the RBA raised the official cash rate target for the seventh consecutive month to a level of 2.85%. The decision to increase rates by a smaller increment of 25bp rather than the 50bps moves favoured earlier in the cycle came despite news that trimmed mean inflation rose by 1.8% in the September quarter, the largest quarterly increase since 1990. The RBA Board sees “returning inflation to target requires a more sustainable balance between demand and supply”, recognising that monetary policy operates with a lag. The labour market remains very tight, the unemployment rate was 3.5% in September, around the lowest rate in almost 50 years. The RBA’s central forecast is for the unemployment rate to remain around its current level over the months ahead, but to increase gradually to a little above 4 per cent in 2024 as economic growth slows. The Board “remains resolute in its determination to return inflation to target and will do what is necessary to achieve that”.
On the data front, the Westpac Melbourne Institute Consumer Sentiment Index fell by 6.9%, from 83.7 in October to 78.0 in November. This figure is below the low point of the GFC (79.0) and only slightly higher than when the COVID pandemic first hit in April 2020 (75.6).
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/ubs_aust_bond-3.pdfOctober, 2022
Australian sovereign bond yields fell over October as investors remained concerned about the growth outlook. Australian 3- year Government bond yields fell 23bps, ending the month at 3.29% while the 10-year Government bond yield fell 13bps, to end the month at 3.76%. The spread of Australian 10-year Government Bond yields against US 10-year Government bond yields inverted, reaching -29bps from +6bps the month prior, a significant outperformance as US yields continued to rise. Credit spreads widened over the month (Bloomberg AusBond Credit 0+ year index widened from 148bps to 169bps).
The Bloomberg AusBond Composite 0+ year index returned 0.93% in October. In early October, the RBA raised the official cash rate target by 25bps to reach 2.60%, a shift from the previous four 50bps hikes. The RBA is aiming to deliver both lower inflation and a soft landing for growth, with their statement noting that they had increased the cash rate 'substantially in a short period of time'. The Board had slowed the pace of hikes in part to 'assess' their impact on the inflation and growth outlook. Given the tight labour market and the upstream price pressures, the Board will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms in the period ahead. Looking forward, the Board commented that ‘further increases are likely to be required over the period ahead’.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/ubs_aust_bond-2.pdfSeptember, 2022
Australian sovereign bonds sold-off across the curve over September in line with moves in offshore bond markets as global investors remained concerned about the inflation outlook and pace of central bank hikes. Australian 3-year Government bond yields rose 32bps, ending the month at 3.52% while the 10-year Government bond yield increased by 29bps, to end the month at 3.89%. The spread of Australian 10-year Government Bond yields against US 10-year Government bond yields tightened versus the prior month with the spread coming in from 41bps to 6bps. Credit spreads widened over the month (Bloomberg AusBond Credit 0+ year index widened from 137bps to 148bps). The Bloomberg AusBond Composite 0+ year index returned -1.36% in September, driven by both rising treasury yields and spreads widening.
In early September, the RBA raised the official cash rate target by 50bps to reach 2.35%, a move that was widely anticipated by market participants. The tone of the RBA’s Statement aligned with the market’s expectations for further tightening, though there was a hint at slowing down the pace of hikes with text referencing “the full effects of higher interest rates yet to be felt in mortgage payments” and the removal of the description of rate rises as “normalisation.” On the data front, the Westpac consumer confidence survey for September reported a bounce in confidence, with the index printing 3.9%. However, with the index at 84.4, it remains at near historic lows. The Australian labour market remains extremely tight, with the unemployment rate printing at 3.5% and job growth at 33.5k in August. The Australian Bureau of Statistics also unveiled its new monthly CPI series, which showed headline inflation printing at a historically elevated 6.8% y/y. Yet, market participants are likely to place more weight on the established quarterly series, with the Q3 release due on 26 October, to guide rate hike expectations..
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/ubs_aust_bond-1.pdfAugust, 2022
Australian Government bonds sold-off across the term structure in August. The portfolio’s slight long duration position over the month contributed a small negative to relative performance. During the month, we repositioned some of our duration from the 10-year tenor into 20-year tenor. Our overall global rates exposures contributed a strong positive to relative performance, primarily driven by our outright short Japan 10-year and short German 2-year Schatz positions, and our cross trade between German 2-year Schatz (short) against New Zealand 2-year interest rate swaps (long). Meanwhile, the other existing spread tightener trade - long New Zealand 10- year interest rate swaps against short US 10-year duration – detracted slightly. A small outright long New Zealand duration position was also a slight detractor to relative performance.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/ubs_aust_bond.pdfMay, 2022
Fixed income sectors generated mixed performance in May with US bond markets generally outperforming their European counterparts. US corporate bonds were amongst the strongest performers, buoyed by falling US Treasury yields and narrowing credit spreads. On the other hand, European investment grade and high yield bonds both generated negative returns (in USD terms) driven primarily by widening spreads. Elsewhere, locally denominated Emerging Market bonds posted solid positive returns with gains in both local rates and EMFX. The yield on 10-year Treasuries fell from 2.93% to 2.84% and the 2-year equivalent declined from 2.71% to 2.56%.
The Australian bond market underperformed their global counterparts as Australian government bond yields took another leg up in May. The Australian 10-year bond yields rose 22bps to finish the month at 3.35%, with the spread against US 10-year bond yields widening to 50bps (from +19bps at the end of the prior month). The Bloomberg AusBond Composite 0+ year index returned -0.89% in May driven by both rise in bond yields and credit spreads widening (Bloomberg AusBond Credit 0+ year index widened from 117bps to 126bps).
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/188132469.pdfApril, 2022
Credit sectors took another leg down in April with US high grade and EM hard currency sovereign bonds amongst the worst performers as yields moved higher and credit spreads widened. 10-year US Treasury yields climbed 59bps to 2.93% in April, having reached an intra-month high of 2.98%. The US dollar outperformed all other G10 currencies driven by market expectations of faster and further rate hikes by the US Fed relative to other developed countries.
The downtrend for the Australian bond market continued with another month of negative performance in April. The Bloomberg AusBond Composite 0+ year index returned - 1.49% for April, and -9.32% YTD – a result of 4 months of consecutive negative returns. This was driven primarily by the sell-off in Australian government bonds where 10-year yields rose 146bps YTD. The Australian 3-year Government bond yields increased 37bps to 2.71% while 10-year bond yields rose 29bps to 3.13% over the month. The spread between Australian 10-year and US 10-year Government bond yields narrowed, ending the month at +20bps (from +50bps at the end of the prior month). Domestic credit spreads referenced by the Bloomberg AusBond Credit 0+Yr Index, widened 9bps from 108 to 117bps.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/187296374.pdfMarch, 2022
Yields rose in March, especially at the front end of the curve, as investors positioned for a faster pace of central bank policy tightening in response to elevated inflation. 10-year US Treasury yields climbed 51bps to 2.34%. The 2-year/10-year portion of the curve inverted briefly for the first time since August 2019. In Europe, yields on 10-year German Bunds climbed 39bps to 0.55%. Most major fixed income sectors generated negative returns driven by higher yields despite tighter credit spreads during the month.
The Australian bond market delivered negative return in March as domestic government yields rose strongly across the term structure with a larger impact on the front-end, and credit spreads widened. The Australian 3-year Government bond yields rose 80bps to 2.34% while 10-year bonds yields rose 70bps to 2.84% over the month. The spread between Australian 10-year and US 10-year Government bond yields widened, ending the month at +50bps (from +31bps at the end of the prior month). Domestic credit spreads referenced by the Bloomberg Ausbond Credit 0+Yr Index, widened 18bps from 90 to 108bps
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/186398182.pdfFebruary, 2022
Most major fixed income sectors delivered negative returns during the month given the combination of higher developed market government bond yields and widening credit spreads. Spread movement at the beginning of the year was initially driven by technical factors related to more hawkish central bank policy but has more recently been driven by the onset of the Russia-Ukraine war which has contributed to risk-off sentiment in spread sectors. US investment grade corporate spreads (as measured by the Bloomberg US Corporate Index) finished the month 16 basis points wider at 122 basis points. US high yield spreads (as measured by the ICE US Cash Pay High Yield Constrained Index) finished the month 14 basis points wider at 369 basis points. Emerging market hard currency sovereign spreads (as measured by the JPMorgan EMBI Global Diversified Index) finished the month 86 basis points wider at 469 basis points.
The Australian bond market delivered negative return in February as domestic government yields rose across the term structure and credit spreads widened. The Australian 3-year Government bond yields rose 23bps to 1.54% while 10-year bonds yields rose 24bps to 2.14% over the month. The spread between Australian 10-year and US 10-year Government bond yields widened, ending the month at +31bps (from +12bps at the end of the prior month). Domestic credit spreads referenced by the Bloomberg Ausbond Credit 0+Yr Index, widened 7bps from 83 to 90bps.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/185528640.pdfJanuary, 2022
Virtually all major fixed income sectors generated negative returns in January. Developed market bonds in Europe and the US suffered from rising yields but generally outperformed corporate bonds and other spread sectors that were impacted by a combination of rising yields and widening spreads. EM local currency bonds were one of the best performing asset classes buoyed by gains in EM FX that largely offset losses in local rates. China Fixed Income posted a solid gain for the month as rates rallied and the currency held its own against the dollar. The US 10-year yield moved up around 27 basis points to 1.78% at the end of the month while the 2-year yield, which is more sensitive to Fed policy expectations, rose even more, up around 45 basis points to end the month at 1.18%.
The Australian bond market delivered negative return in January as global and domestic government bond sold off. The Australian 3-year Government bond yields rose 40bps to 1.31% while 10-year bonds yields rose 23bps to 1.90% over the month. The spread between Australian 10-year and US 10-year Government bond yields narrowed, ending the month at +12bps (from +16bps at the end of the prior month). Similar to global bond markets, domestic credit spreads mostly widened. The semi-government sector referenced by the Bloomberg Ausbond Semi-government 0+Yr Index, widened 3bps from 26 to 29bps.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/184034509.pdfDecember, 2021
US government bond yields gradually rose throughout December, as volatility surrounding the omicron variant subsided and the market began focusing on the implications of the Fed's upsized tapering and the potential for swifter policy tightening. Credit spreads tightened in December, with high yield spreads tightening more than investment grade and retracing the omicron-induced widening from the previous month. Total returns were generally positive in the high-beta segments and negative in higher quality, rate sensitive segments of the fixed income market as rates rose during the month.
The Australian bond market delivered a slight positive return in December and domestic government bond yields traded in a tight range. The Australian 3-year Government bond yields rose 4bps to 0.91% while 10- year bonds yields fell 2bps to 1.67% over the month. The spread between Australian 10-year and US 10-year Government bond yields narrowed, ending the month at +16bps (from +25bps at the end of the prior month). Credit spreads were relatively unchanged while semi government bond spreads tightened marginally over the month. The Bloomberg AusBond Composite 0+Yr Index returned 0.09% in December.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/182694159.pdfNovember, 2021
Credit spreads widened during the month of November, with high-beta segments most affected by worries over rising inflation and later the impact of the omicron variant. It was a month of two parts for longer-term US government bond yields. For much of the month, yields trended higher amid concern over the potential for swifter policy tightening from the Federal Reserve. This contributed to a rise in 10-year Treasury yields from 1.56% at the start of November to around 1.68% by 24th November. But the mood shifted abruptly with growing concern over the omicron variant, sending the 10-year yield down to 1.46% by the end of the month. The Australian bond market delivered positive return in November largely due to falling domestic government bond yields. The Australian 3-year Government bond yields fell 35bps to 0.87% while 10-year bonds yields fell 40bps to 1.69% over the month. The spread between Australian 10-year and US 10-year Government bond yields narrowed, ending the month at +25bps (from +54bps at the end of the prior month). Both credit and semi-government bond spreads widened over the month. The Bloomberg AusBond Composite 0+Yr Index returned 2.08% in November.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/181854064.pdfSeptember, 2021
Developed market high-beta segments outperformed their lower beta counterparts during the month of September. However, total returns were negative given headwinds from the move higher in rates in both the US and Europe. The only credit segments showing a positive return were US and European senior loans, which are insulated from higher rates. EM Sovereign bonds in USD dollar fell during the month, reflecting their longer duration as well as developments in China’s property sector and one of its most indebted companies, Evergrande.
The Australian bond market delivered negative return in September largely due to rising Australian Government Bond yields. The Australian 3-year government bond yields rose 7bps to 0.31% while 10-year bonds yields rose 33bps to 1.49% over the month. The spread between Australian and US10 year government bond yields narrowed its difference to end the month at the same level (from -15bps at the end of the prior month). Credit spreads widened marginally over the month. Semi-government bonds performed well in September on the back of the announcement from RBA that the Common Liquidity Facility (CLF) will be slowly phased out over 2022. The Bloomberg AusBond Composite 0+Yr Index returned -1.51% in September.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/179975860.pdfAugust, 2021
Developed market government bond yields rose during the month of August. The 10-year US Treasury ended the month close to 1.3%, up modestly from around 1.22% at the start of the month. The yield on 10-year German Bunds ended the month at –40bps. Consequently, duration-sensitive sectors such as US and European IG generated negative returns. Spreads tightened in higher beta sectors such as US and European HY leading to positive total returns for the month. EMD hard currency bonds posted a positive monthly return driven by spread tightening despite rising US Treasury yields. The Australian bond market delivered a slight positive return in August. Credit spreads were broadly stable, trading in a tight range over the month. Semi-government bonds’ spreads widened by 4bps on the back of high issuance during the month. The Bloomberg AusBond Composite 0+Yr Index returned 0.09% in August. The Australian 3 year government bond yields remained flat at 0.24% while 10 year bonds were 2bps lower in yield, to 1.16%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/179317190.pdfJuly, 2021
The 10-year US Treasury rallied in July, with yields falling from 1.47% to finish the month at 1.23% and the curve flattened. European rates followed a similar pattern, with the 10-year yield on German Bunds decreasing by 25bps to end the month at -0.46%. Global bond market returns were broadly positive, driven by spread tightening in most credit markets and falling US Treasury yields. US and EUR HY eked out small gains in July. EM Sovereign bonds were also slightly up for the month, however spreads on Asia HY widened by 106bps due to ongoing negative news flow around the Chinese property developer Evergrande.
The Australian bond market delivered positive return in July as the Australian Government Bonds rallied across the curve over the month. Credit spreads were broadly, trading in a tight range over the month. The Bloomberg AusBond Composite 0+Yr Index returned 1.76% in July.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/176026720.pdfJune, 2021
The yield on the 10-year US Treasury declined 13 basis points from the start of June while the German 10-year Bund yield moved little over the month, with yields falling just 2 basis points to –0.19%. Global bond markets posted a positive return in June due to a combination of falling US Treasury yields and tightening credit spreads.
The Australian bond market delivered a modestly positive return in June. The yield curve flattened while credit spreads tightened marginally with financials outperforming nonfinancials. The Bloomberg AusBond Composite 0+Yr Index returned 0.69% in June.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/174870801.pdfApril, 2021
US long-term bond yields fell at the beginning of April and then remained broadly range-bound for the rest of the month. The 10-year US yield finished the month at 1.63%, 11 basis points lower than the peak reached at the end of March. The Australian bond market delivered a positive return in April, with government bond yields declining and corporate spreads compressing over the month. The Bloomberg AusBond Composite 0+Yr Index returned 0.56% in April, on the back of a strong return from domestic bonds in March. The spread of the Bloomberg AusBond Credit 0+ Index over government yields narrowed by 9 bps to 62bps.
The portfolio continued to hold a small overweight duration position in April. We were positioned with a curve flattening bias, favouring the belly of the curve – with shorter-dated bond yields pinned down by the RBA's policy of yield curve control. With five-year government bonds rallying by around 5 bps over the month, our rates positioning made a positive contribution to relative performance.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/172013735.pdfNovember, 2020
After fees and expenses, the portfolio increased by 0.03% over the month outperforming its benchmark by 14bps. November was a strong month for risk assets with global equities and bonds rallying in the wake of the outcome of the US presidential election and positive news on the development of effective COVID-19 vaccines. Within Fixed Income US 10-year Treasury yields declined immediately following the US election results, then moved higher on vaccine optimism. The Australian bond market underperformed global counterparts given longer-dated Australian government bond yields stepped higher over the month.
Australian 3 year government bond yields initially traded lower but this was short-lived as they retraced to close the month back near where they began at 0.11%. Meanwhile 10 year government bond yields closed the month 7bps higher at 0.90%. Australian credit markets enjoyed a rally with the US election result, positive vaccine news and the reopening of Victoria. We entered November with a long duration position held in the 10 year part of the Australian curve. Government bonds enjoyed a brief rally on the announcement that the Reserve Bank of Australia (RBA) had eased monetary policy at its November Board meeting, as was widely expected by market participants.
The 'significant package' included a cut in the official cash rate from 0.25% to 0.10%, reduction of the target yield for 3 year government bonds to 0.10%, reduction of the Term Funding Facility rate to 0.10%, and A$100bn of government bond purchases 'with maturities of around five to 10 years' over the next six months. Market attention then turned quickly to the US Presidential election, with Australian government bond yields moving in sympathy with US Treasuries over the subsequent days, rallying on the initial election night uncertainty before selling off as swing-state results began to favour Presidentelect Biden. We added some duration during the sell-off, going longer in the belly of the curve as well as around the 10 year node. Bond yields then steadied, trading within a relatively tight range over the rest of November. The 3 year yield closed lower on the month, anchored by $5 billion of yield curve control purchases from the RBA, while 10 year yields rose marginally, reflecting global trends. Our long duration position detracted modestly from relative performance. Credit positioning was a strong positive contributor to performance as Australian credit spreads tightened over the month. The RBA's inclusion of semi-government bonds in its asset purchases was positive for spreads in that sector, where we have long retained an overweight allocation.
Elsewhere, our selective overweight exposure within corporate credit added to excess returns, with positioning in industrial names particularly beneficial for performance. BBB credit spreads outperformed higher rated names, adding to performance here. We also closed our small underweight to sovereign, supranational and agency bonds by adding some exposure to the World Bank through the primary market. Later in the month, we took some profits on the semigovernment positions to participate in the inaugural bond issuance from the NBN.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/162698137.pdfticker: SBC0813AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
manager_contact_details: Array
asset_class: Fixed Income
asset_category: Bonds - Australia
peer_benchmark: Fixed Income - Bonds - Australia Index
broad_market_index: Australian Bond Composite 0-10Y Index
structure: Managed Fund
fund_features:
UBS Australian Bond Fund aims to outperform (after management costs) the Bloomberg AusBond Composite 0+Yr Index over rolling three year periods. Eligible investments of the Fund comprise fixed income and cash equivalent securities. Investments of the Fund may include government, semi-government and corporate bonds; mortgage and other asset backed securities. At the time of purchase, all securities of the Fund must be of investment grade credit rating.
- The Fund may choose not to sell securities that are downgraded below investment grade after their purchase.
- The Fund may also invest in financial derivatives to gain or reduce exposure to relevant markets and manage investment risk.
- Foreign currency exposures are hedged to $A.
- Manager Address : 108 St Georges Terrace, Perth WA 6000
- Phone : +61-08-6188 4800
- Website : https://www.ubs.com/au/en.html