Australian Bond Exchange

Oil’s well that ends well?

ABEWeekly 25-03-22

“The oak fought the wind and was broken, the willow bent when it must and survived.”

  • The Fires of Heaven, Robert Jordan

Key Points

  • The key challenge continues to be whether the Federal Reserve and other central banks can successfully suppress inflation without tipping their economies into stagflation or outright recession. This would lead to elevated levels of credit risk for many corporations.
  • The ongoing uncertainties and volatility in investment markets reinforce the need to ensure that investment portfolios are spread across multiple asset classes to protect and build wealth.
  • Investment in carefully selected corporate bonds from leading global companies provide both higher, regular and reliable income than many alternatives, as well as potential opportunities for portfolio diversification.
  • We held a webinar this week launching our latest offering, a bond linked to Fortune 500 company Goodyear Tire & Rubber. You can watch the recording here. Full documentation for this bond is available here.
  • You can also still invest in bonds linked to FHIM Trade Logistics, Xerox, and Pallas Capital.


The results of the recent profit reporting season, substantial accumulated corporate and household savings (Commonwealth Bank economists estimated this week that consumers have some $260 billion to spend), and healthy business sentiment and employment numbers all indicate that credit risk for Australian corporations remains low.

National Australia Bank’s most recent business sentiment survey shows Australian businesses are keen to hire and willing to pay higher wages, despite increased business input costs.

The February labour force survey revealed the creation of 77,000 new jobs, taking the unemployment rate down to 4%. The labour market is likely to remain tight given continuing COVID-19-related constraints on international movement and the effects on the migration program.

Australia should benefit from continuing demand and higher prices for our coal and base metals as a result of international sanctions on Russian supply, boosting our national income and terms of trade.

Federal Treasurer Josh Frydenberg has already indicated that next week’s Federal Budget will contain targeted measures to alleviate household cost of living pressures from higher prices for petrol, food, and other goods.

The Reserve Bank of Australia remains acutely aware of heightened geopolitical risks as well as lingering uncertainties about the length of time required for a broadly based and sustained pick-up in wages growth necessary to sustainably achieve inflation in the 2-3% target band.

Westpac’s economists continue to believe that the Reserve Bank’s first hike in its policy cash rate will take place in August, rather than the June some other commentators are anticipating. Commonwealth Bank economists are currently picking the cash rate to peak at 1.5% (compared with the market consensus prediction of 2.5%).


Events in eastern Europe continue to influence global economic activity and sentiment both directly and indirectly. 

Considerable uncertainties remain about whether Russia will be able to avoid defaulting on its sovereign debt. Although a $US117 million interest payment was made on US$-denominated bonds last week, coupon payments were not made on US$-denominated Eurobonds.

S&P Global Ratings last week cut Russia’s credit rating to ‘CC’, only a couple of notches above default, and described the country’s debt as “highly vulnerable to non-payment”.

Oil prices have fluctuated but generally trended downwards over the past week. Intelligence Report notes disagreement among European Union member countries, with Germany, in particular, dissenting from any proposed initiative to impose an embargo on Russian oil imports.

While the International Energy Agency has forecast a deficit of 700,000 barrels per day in the second quarter of this year as a result of the withdrawal of Russian oil from global supply, concerted efforts are underway to increase supply from the United Arab Emirates, Iran, and Venezuela.

Higher energy costs will continue to stress businesses and households in Europe, although this is likely to abate as the northern hemisphere moves into warmer weather in the coming months.

Uncertainties also remain about the extent to which China will be able to contribute to the ongoing post-pandemic global economic recovery.

There has been a pick-up recently in Chinese industrial production and retail sales. However, the authorities’ severe restrictions on several cities in response to COVID-19 outbreaks are likely to have flow-on effects on global supply chains. Any prolonged deterioration in Chinese economic activity as a result of a more widespread Omicron outbreak is a further potential risk to global economic activity.

While central banks remain keenly attuned to the dangers of damaging the post-pandemic recovery during a period of significant geopolitical stresses, the shift is clearly towards aggressive monetary policy tightening.

Investors are now focused on the potential speed and size of future rate hikes.

Announcing last week’s 0.25% hike in the federal funds rate, the U.S. Federal Reserve stated that it expected to keep increasing rates until they reach 1.75 – 2.00% by the end of this year.

Fed Chair Jerome Powell’s accompanying comments referred to price stability as a “precursor” to a “strong and sustained labour market”.

In tougher comments to the National Association of Business Economists in Washington this week, Powell stated: “If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so.”

The Bank of England also raised its policy cash rate last week by 0.25% to 0.75%.

The key challenge continues to be whether the Federal Reserve and other central banks can successfully suppress inflation without tipping their economies into stagflation or outright recession. This would lead to elevated levels of credit risk for many corporations.

 The progressive flattening of the bond market yield curve suggests that markets are pricing in a higher risk of recession than the monetary authorities are.

A number of indicators argue against a recession in the U.S. The labour market remains healthy, while the Fed’s forecasts are that the U.S. economy will grow by 2.8% this year and 2% in 2023. Fed Chair Powell stated this week that he didn’t see any reason for an elevated likelihood of a recession in the coming year.

As always, these ongoing uncertainties and the volatility in investment markets reinforce the need to ensure that investment portfolios are not over-dependent on any asset class, region, or sector to protect and build wealth.

Investment in carefully selected corporate bonds can offer both regular and reliable higher income than many alternatives, as well as the potential for increased portfolio diversification.

Corporate bonds are not term deposits, and come with additional risks.

Current Investment Opportunities

Goodyear Tire & Rubber

Our new Goodyear bond is a fixed coupon credit-linked note yielding 4.5% per annum and maturing in March 2027.

The bond is issued in Australian dollars, eliminating foreign currency risk.

We held a webinar earlier this week launching the offering. You can watch it here, and full documentation for the offer is available here.

NASDAQ-listed Goodyear develops, manufactures, and sells tires for cars, trucks, buses, aircraft, and earthmoving and mining and industrial equipment in 48 facilities in 21 countries.

The company earned $US17.5 billion in revenue in 2021, more than leading Australian companies such as Commonwealth Bank of Australia and National Australia Bank.

Goodyear is a leading global consumer discretionary company. This bond can help you introduce sector diversification to your investment portfolio.

FHIM Trade Logistics

This Australian dollar-denominated note is linked to a shipping and trade finance fund from TradeFlow Capital Management.

TradeFlow is a fintech-powered commodity investment strategy and business which enables physical commodity trading, using a proprietary digital trade services platform to manage and monitor cargoes globally.

This senior unsecured unsubordinated note will pay a 5.50% fixed rate quarterly, maturing in October 2025. All coupons and any final value will be in Australian dollars. The note is suitable for sophisticated/wholesale investors. You can read full documentation here.


You can still invest in an Australian dollar fixed coupon credit-linked note over Xerox Holdings Corporation, a 6.5-year note offering a 4.50% per annum fixed rate with coupons paid half-yearly. You can read full documentation here.

Pallas Capital

You can also still invest in the 7.5% fixed rate senior secured note issued by real estate financier Pallas Capital (wholesale/sophisticated investors only).

Contact us if you have any questions or would like any assistance.

Copyright © 2022 Australian Bond Exchange Pty. Ltd. (“ABE”). ABE provides both general and specific financial product advice. Unless otherwise stated, any advice contained in this content is of general nature only and any information, advice or recommendation has been provided by ABE without taking account of your objectives, financial situation or needs. Because of this, you should before acting on any information, advice or recommendation from ABE consider the appropriateness of the information, advice or recommendation, having regard to your objectives, financial situation and needs. If this document, or any information, advice, or recommendation, relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a product disclosure document relating to the product and consider the document before making any decision about whether to acquire the product. ABE, its directors, representatives, employees, or related parties may have an interest in any companies or entities, or any financial product issued by companies and entities, and may earn revenue from the sale or purchase of any financial product, referred to in this document or in any information, advice, or recommendation. Neither ABE, nor any of its directors, representatives, employees, or agents, make any representation or warranty as to the reliability, accuracy, or completeness, of this document or any information, advice, or recommendation. Nor do they accept any liability or responsibility arising in any way (including negligence) for errors in, or omissions from, this document or any information, advice, or recommendation. Any reference to credit ratings of companies, entities or financial products must only be relied upon by a “wholesale client” as that term is defined in the Corporations Act 2001 (Cth). ABE strongly recommends that you seek independent accounting, financial, taxation, and legal advice, tailored to your specific objectives, financial situation or needs, prior to making any investment decision. ABE does not make a market in the securities or products that may be referred to in this document.