Daily Commentary BY THE CURVE TEAM –

Weekly Insights – Bond Value

6th of September, 2021

Key Updates

Monday – ANZ Job Ads for August

Tuesday – RBA Decision

Thursday – Weekly Payrolls

Guy Debelle Addresses, Wednesday and Thursday

5 Year Bond Yields

Let’s look back over the major bank 5 Year Fixed bond market for the past year (in the featured image). Yields started compressed and strong. In February, yields spiked as the market anticipated inflation in response to the enormity of monetary and fiscal stimulus. This tested the RBA’s ability to hold its Yield Curve Control (YCC) target.

Few expected fixed bonds would start to gradually decline, like they have for the rest of year. Inflation panics have been smoothed out, the RBA maintained its credibility to meet their yield curve target, and we lie relatively compressed again.

Markets are waiting for central banks to continue talking about talking about tapering, and the medium term impacts of lockdowns to play out. Should QE tapering not occur (as three of four major banks anticipate it will on Tuesday) and lockdowns prove persistent, yields will likely remain suppressed. QE tapering, a resurgent economy and new bond issuance (which should at the latest arrive near the TFF expiry) will be the impetus of increases in yields.

However, relative value can still be found. In June, 5 year fixed bonds were more attractive than 5 year term deposits, yielding over 1.30%. This would have amounted to a more liquid investment than a TD for a higher yield. This has now reversed, with 5 year term deposits yielding 1.15%, and NTTC bonds providing 1.40% semi-annually.

Interestingly, the term premium between a 4 year and 5 year has not changed over the course of this year. Yields have moved symmetrically. A 30 point pick up highlights the importance of duration in a low interest rate environment, in order to secure yield.

This term premium was not the case leading into the Covid Crisis. In fact, the same set of bonds shown above, only provided a 20 point premium in January 2020 (see the 2020 graph).

Nick Allan

Associate - Money Markets