Australian Bond Exchange

ABEWeekly 28-01-22“We don’t have to be fast; we simply have to be steady and move in the right direction. Direction is always going to trump speed.”

  • Toni Sorenson

 Economic and Bond Market Outlook

The past week saw high levels of volatility in share markets and in the prices of leading cryptocurrencies. The largest digital currency, Bitcoin, fell at one point to its lowest level in six months.

(The fact that many cryptocurrencies moved in the same direction as share markets is an interesting reflection on crypto’s alleged effectiveness as an investment portfolio diversifier.)

These riskier assets were sold off on the strengthening prospect that central banks around the world are preparing to increase their official cash rates. The United States Federal Reserve has now indicated that it will begin lifting interest rates as early as March, as it steps up its response to significant increases in inflation.

Here at home, the Australian Bureau of Statistics released December quarter Consumer Price Index (CPI) data on 25 January. This showed that inflation rose 1.3 per cent over the three months to 31 December, and was up 3.5 per cent over the year. This was driven in particular by strong increases in the prices of new houses and shortages of building supplies and labour, and by higher automotive fuel prices.

Westpac’s Bill Evans has said that: “the RBA Board will use three criteria… the actions of other central banks, how the Australian bond market is functioning, and most importantly, the actual and expected progress towards the goals of full employment and inflation consistent with the target.”

Although latest available employment statistics showed strong jobs growth in December, since then consumer confidence and household spending have been affected by the continuing uncertainties associated with the Omicron variant of the COVID-19 virus.

In this environment, it is possible that at its first meeting for the year next Tuesday, that the Reserve Bank will announce a small increase in its cash rate. It remains however equally likely that the Bank will leave the cash rate at 10 basis points, where it has been since November 2020.

Comments from the Reserve Bank still suggest that it may start raising rates around August this year, although given the experience of the past years, anything is possible.

It would however not be surprising to see the Reserve Bank next week announce a reduction in or end to its quantitative easing (QE) activity, in which the Bank buys several billion dollars of Australian federal and state government bonds each week.

The bond market has for some time been pricing in rate rises. The following chart shows the spread between the two-year and 10-year Australian government bonds, the rise during 2021 signifying the market’s anticipation of future rate rises.

Current Investment Opportunities

You can now 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.

This represents an opportunity to invest in debt linked to a Fortune 500 corporation which provides digital document products and services in more than 160 countries and to diversify with a bond not previously available in Australia. The product documentation is available here.

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

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

We continue to work on building a pipeline of new debt issues for 2022, applying our exacting standards and rigorous product approval process to provide opportunities to invest in quality, high-yielding corporate debt.