Daily Commentary BY THE CURVE TEAM –

Weekly Insights – Market Overview

25th of October, 2021

Key Updates

Wednesday – CPI for Q3

Thursday – Import and Export Price Index

Friday – Retail Sales September, Private sector credit September and Q3 PPI

Market Overview

BOQ’s bond issue last week was an example of the higher yields available following the recent run up in bond yields. The floating issue was +80 for 5 years and the fixed issue 2.13%.

To receive the equivalent return for the fixed and the floating, BBSW needs to average 1.33%. It is currently 0.04%, so in 2025 and 2026 is will very likely need to be well above 1.30%. We still believe this is an example of markets overestimating the ability of the RBA to continuously increase the cash rate over the next 5 years.

Given this, we saw investors more inclined to go with fixed rate investments rather than floating. Whereas the previous 18 months investors have generally been reluctant to do fixed investments and term out.

So far, the run up in yields has shown a few key elements:

  • Curve steepening – so the opportunities are most pronounced for longer terms. The RBA purchased $1 billion of the April 2024 government bond (their target) at the end of last week. This will keep shorter terms suppressed relative to terms beyond 2024.
  • Fixed rates have risen more sharply than floating rate margins. Which makes sense, given higher rate expectations will flow through to BBSW, which will result in higher floating returns in years to come.
  • Bond rates have risen more significantly than TDs and NCDs. TD and NCD issuance remains very limited and rates have only ticked up slightly. Usually TDs especially have higher returns than bonds mainly due to bonds being liquid, but currently there are numerous bonds that have higher rates than TDs.
  • Stagissuance – Which describes higher yields simultaneous to lower supply. With TFF over the last 18 months, ADI primary bond issues have been very infrequent. It means the supply of bonds to buy on the secondary market is more restricted than pre covid. So even if yields rise, there is no guarantees there will be stock to buy. As ADIs issue bonds to repay the TFF supply should normalise.

Josh Stewart

Associate - Money Markets