ABEWeekly 07072021 (1)

Market Update  

 

“You only live once, but if you do it right, once is enough” – Mae West 

As we go to print the RBA has just announced it will keep interest rates on hold yet again. It also stated that it is currently committed to purchasing the April 2024 bond at 0.1% to achieve its objectives of holding down the short end of the yield curve and providing strong guidance that it does not plan to raise the cash rate until “2024 at the earliest”. In October last year it extended its YCT program from the April 2023 bonds to the April 2024 bonds giving the market some comfort that interest rates will continue to remain low for the short term.  

Phillip Lowe, Governor of the RBA, announced the intention to reduce the weekly purchases from $5 billion to $4 billion and not to extend its Yield Curve Target from the April 2024 bonds to the November 2024 bonds – two clear signs that policy is tightening. However, further commentary suggested that increased QE would not extend beyond Nov 2021. In other words, the RBA is hedging its bets by leaving the option to delay any expected interest rate rises. 

Back in November last year the RBA forecast that the unemployment rate would be 6.5% by June 2021. The May employment report printed an unemployment rate of 5.1%. With the economy having recovered much faster than the Bank’s expectations in November, Westpac suggest that the RBA Board will decide not to extend the ‘yield target bond’ to the November 2024 bond, keeping it to the Apr 2024. 

As we’ve commented before, for the above scenario to unfold a few things must line up. Economic growth, inflation and wages growth must all fall within the RBA’s targets before any chance of increasing interest rates is taken into consideration 

In terms of the global outlook, Westpac expect that the US Federal Reserve will announce its intention to begin tapering its bond purchases in September with a lift off date in early January carrying through to mid 2022. The FED’s actions, once begun, will give the RBA cover should it decide to curtail its purchases even earlier than our expectation of around mid 2022. 

The important point to note is that if, and when, we see an interest rate rise it will be benign and tipped to be somewhere in the vicinity of 15bps and if we’re talking about 2024, it still puts us a few years away from interest bearing accounts to move. At the same time a healthy and viable corporate bond market is delivering superior returns against a conservative risk profile. 

It still makes the mind boggle, to think that employment numbers are higher, by a long shot, than before the pandemic despite the press constantly reporting about small business closures and the like. The chart below illustrates this very phenomenon. 

This week we look at what a Fintech is and what they do and specifically how the Bond Exchange fits into this category. Broadly, the term “financial technology” can apply to any innovation in how people transact business, from the invention of digital money to double-entry bookkeeping. Since the internet revolution and the mobile internet/smartphone revolution, however, financial technology has grown explosively, and fintech, which originally referred to computer technology applied to the back office of banks or trading firms, now describes a broad variety of technological interventions into personal and commercial finance. In terms of the Bond Exchange, it has created technology to facilitate next generation financial transactions for the bond market. Through various interfaces it has established how current and future generations will invest in fixed income. 

 

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