Daily Commentary BY THE CURVE TEAM –

Weekly Insights – Yield Rises Continue

1st November, 2021

Key Updates

  • Tuesday – RBA meeting
  • Wednesday – Building Approvals for September
  • Thursday – Trade Balance for September
  • Friday – RBA Quarterly Statement on Monetary Policy

Yield Rises Continue

The sharpness in the rise in yields has been drastic. Annual core inflation hitting 2.1% last week sparked market fears of imminent rate hikes and the end of the 2024 government bond yield target.

The RBA’s meeting tomorrow will be very significant. When the April 2024 government bond went to over 0.50% last week, the RBA opted not to buy any to defend the target. Tomorrow, markets await to see if the RBA will officially end the yield target and bring forward their guidance on rate rises.

As an investor, the moves higher are an absolute game changer for what determines value. Australian government and semi-government bonds are considered the safest asset to invest in, so their rates act as a benchmark of what to rates to accept. Their rates are at least:

  • 0.40% for 1 year
  • 1.00% for 2 years
  • 1.50% for 3 years
  • 1.80% for 5 years

Therefore, when investing in bonds and term deposits, these are the minimum rates you should accept.

It is worth noting though:

  • Term deposits rates are slower to respond to market moves than bonds. So bonds are currently offering higher yields than TDs in a lot of instances.
    Consider comparing term deposit yields with an equivalent term and credit bond before investing, which may show you should invest in the bond instead or wait for TD rates to rise in line with bonds.
  • Floating bond margins have not risen as sharply. This is because the rise in rates is expected to lead on to an increase in reference rates in the future, which is added on to floating bond yields when coupons are paid. So if rates rise slower than markets expect, fixed bonds will pose more value than floating rates.

Timing investments still remains a difficult question. Market momentum would suggest rates continue to track upwards. However, any surprise on inflation, employment or a factor relevant to the RBA over the medium term could reverse some of the run up in yields.

Given how sharp the increase in yields has been, investors should strongly consider taking advantage of the opportunities, even if yields have higher to go. As the last month has shown, when yields change it can happen very suddenly. There is every possibility that an unprecedented event results in yields decreasing just as suddenly as they have increased.

Josh Stewart

Associate - Money Markets