Daily Flows & Commentary BY THE CURVE TEAM –

Daily Flow & Insights – Bonds Rally, Risk Sell Off, Domestic CPI to Come

Monday, 25th July, 2022

Daily Flows

  • Flows remained modest on Friday with investors taking advantage of reference rates.
  • Investors bought 2-3 month NCDs given BBSW rose for these tenors and sold off in 4-6 months.
  • A domestic BBB issuer continues to outperform the market offering 4.45% for 1Yr TD on select parcels.

Bond Market Rallies

  • Global bond markets rallied heavily on Friday, with 10Yr bonds falling over 10 basis points.
  • It comes as PMI data in Europe and the U.S. implied recession risk, both of which came out much lower than expected.
  • In response, risk sentiment plummeted and investors turned to bonds to secure their capital. Supply and demand saw bonds rally significantly and this is likely to transpire in the Australian market today.
  • The 5yr-5yr in America has hit the same level since Feb ’22 as the market starts to believe that Powell can combat inflation.
  • However, with the Fed meeting later this week, this sentiment may change if Powell does not take an aggressive stance. Markets are still calling for a 1% increase in the cash rate.

Domestic CPI

  • CPI is released on Wednesday in Australia.
  • Markets are calling for an increase to headline inflation of 1.2% (YoY) taking the print to 6.3%.
  • Trimmed mean CPI is expected to hit 4.7% YoY, well outside of the RBA’s 2-3% range.
  • This will place further pressure on the RBA to maintain an aggressive stance and reach the neutral level quicker.
  • Markets and economists were originally predicting that the RBA may halt rate hikes after this month. Given the strong labour data and the inflation predictions, this becomes less likely.

Nicholas Allan

Curve Team