October, 2020
Front end yields fell over the course of the month with 3-year bonds touching a low of 0.09%. The increased talk of the Reserve Bank of Australia (RBA) introducing a quantitative easing (QE) program was the key driver of this move. 10-year yields initially followed the move lower with the yield curve flattening to 56.5bpts, its lowest level in months. 10-year yields were unable to hold onto their gains, finishing 0.04bpts higher at 0.83%. While Australian 10-year yields rose over the month they outperformed those in the US with the spread differential going negative during the month before closing out the month at zero. Over the month we progressively added around 1.25 years of duration to our fund to finish the month at 5.24 years.
A speech by RBA Governor Dr Philip Lowe presented at the Citi Australian/NZ investment conference in mid-October gave a very clear signal that the RBA would deliver additional policy response at their November meeting. In particular the Governor provided a strong indication that a traditional bond buying (QE) program could be introduced. This was subsequently delivered upon, including additional policy changes at their November meeting.
US yields moved higher over the month as risk sentiment improved supported by expectation of a US Fiscal stimulus agreement and a Biden Presidential win. Lack of progress on the fiscal front resulted in bond volatility through the month. Markets ignored equity weakness and rising Northern Hemisphere COVID19 cases which heightened concerns that lockdowns would delay the global recovery with US 10-year treasury yields finishing 0.19% higher over the month at 0.875%, a level not seen since March.
Australian credit markets continued to perform well in October with spreads compressing between 10-15bpts depending on the sector. The RBA's Term Funding Facility (TFF) has meant local banks issuance has largely stopped resulting in a supply/demand imbalance which has seen a strong compression of spreads. This lack of bank supply has created slipover effects into the broader credit markets as investors look for alternative investment grade options. A few sectors, including REIT's, airports, universities, auto and airline continue to trade wide relative to pre-COVID-19 levels, but should see continued improvement with the opening of Victoria. To date the market has seen $40bn of issuance, down 30% on last year, driven by the large decline in major bank issuance. The fund continued to hold a large weighting in Green and Social linked bonds, with Corporate holdings largely unchanged over the month. Small investments were made in the Mizuho 3 year and the Lendlease 7-year green bond at a spread of 3% over the month.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/altius-bond.pdfAugust, 2020
Portfolio Performance and Activity
As expected the Reserve Bank of Australia (RBA) maintained its current policy setting at the August 2020 meeting, with cash rates and the 3-year bonds targeting 0.25%. Long dated government yields rose sharply over August with 10-year bonds pushing above 1% in the final week before finishing at 0.98%. The US market was the catalyst for this move. While inflation will remain mooted over the coming years the announcement by the Federal Reserve that it would relax its inflation target and be more tolerant of inflation going forward gave the market reason to pause. The spike in yields resulted in a steepening of the 3-10 year curve of 0.15%. Semigovernments had a good month with spreads tightening across all tenors. This was against a backdrop of Victoria being placed on negative watch by S&P and significant amounts of issuance over the month. Credit markets continued their strong run over August with spread compressing on average 3-5 basis points. Very mixed earning season with many withholding forward guidance was outweighed by the strong technical bid for corporate debt. Looking below the surface the picture was more mixed with sectors more directly impacted by COVID-19 such as property trusts, airports and airlines experiencing limited compression compared to Telco, Supermarkets and Utilities. We continued to maintain a long interest rate duration position over August finishing the month at 4.32 years. The economic fallout of COVID-19, core inflation sitting well under the RBA's 2- 3% band and unemployment staying high for the medium-term points to continued support for lower rate positioning. Primary credit markets were strong with first time issuer Goodman Australia Partnerships issuing a 2027 and the return of Coles with a dual 5 and 10-year deal, with both being extremely well supports. Off participate increase was the 10-year deal by Aurizon Networks that came well wide of fair value, with speculation that ESG factors drove this pricing. If this is the case this would be the first issuer locally that has seen pricing effect by ESG factors. None of these issuers passed our Sustainability screens. ANZ bought if first SDG bond to the local market. The fund participated in the new issue, with the "use of proceeds" bond made up of 63% green/environmental projects and 37% socially focused.
ticker: WFS0486AU
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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