Australian Bond Exchange Weekly Update
6th June 2025
Key Points
- Australia: The Reserve Bank of Australia (RBA) lowered the cash rate by 25 basis points to 3.85% p.a. Headline inflation held steady at 2.4% year-on-year in April, while core inflation (excluding volatile items) edged up to 2.8%.
- United States: The Federal Reserve kept its target cash rate unchanged at 4.25%–4.50% p.a. Headline inflation in April came in at 2.3% year-on-year, while core inflation rose to 2.8%.
- United Kingdom: The Bank of England (BoE) cut its Bank Rate by 0.25% to 4.25% p.a. April inflation rose to 3.5%, up from 2.6% in March.
- Eurozone: The European Central Bank (ECB) lowered interest rates by 0.25% to 2.00% p.a. Annual inflation fell to 1.9% in May, dipping below the ECB’s 2% target for the first time since 2024.
Market Insights
- Australian economy showing minimal growth
- Eurozone annual inflation falls below target to 1.9%
- ECB cuts interest rates to 2.00%
- Education: Yield to Maturity – the benchmark for total return
Australian economy shows minimal growth
The Australian economy slowed markedly in the March 2025 quarter, with real GDP rising by just 0.2% over the quarter (down from 0.6% at the end of 2024) and 1.3% over the year. This annual growth rate is among the lowest recorded outside of the COVID-19 pandemic and mirrors levels last seen during the early 1990s recession.
The slowdown reflects broad-based softness across key sectors. Household consumption was subdued as interest rates and cost-of-living pressures weighed on spending. Business investment also remained flat, while net exports detracted modestly from growth due to weaker global demand. Government spending provided some offset, but not enough to meaningfully lift overall momentum. With growth stuck at 1.3% for the second straight quarter, the economy appears to have entered a period of slow growth.
While not yet in recession, the figures suggest the recovery has effectively stalled, raising expectations that monetary policy may remain supportive in the coming quarters to help support growth and employment.
Eurozone’s inflation dips below 2% target
Eurozone inflation fell to 1.9% in May, the first sub-2% reading since late 2024. The decline from April’s 2.2% was largely driven by a drop in services inflation, which fell from 4.0% to 3.2% year-on-year. This was partly influenced by the timing of Easter and easing wage pressures.
With inflation cooling, the ECB has lowered interest rates for the eighth time in just over a year, bringing the deposit rate to 2.00%—a level widely seen as neutral. The central bank continues to walk a fine line between supporting economic activity and maintaining price stability amid an uneven recovery and external policy uncertainty.
Education Focus: Decoding the Returns of Bonds and Other Debt Securities
Understanding Yield to Maturity (YTM) – The Benchmark for Total Return
A debt security is essentially a loan from an investor to a company or government. When issued, it usually comes with a face value (also called par value), which is the amount the issuer agrees to repay at maturity. For simplicity, we’ll assume a face value of $100.
However, the prices can move up or down after issuance due to factors such as:
- Interest rate movements: When interest rates rise, existing bonds paying lower coupons may become less attractive, reducing their market value.
- Credit risk: Changes in an issuer’s financial health can also affect a bond’s price.
Despite these fluctuations, if the issuer does not default, the debt security holder typically receives the full face value when the security matures.
Let’s consider a hypothetical example: You’re looking at a fictional Bond X with a face value of $100 and an annual coupon rate of 4.5%, meaning it pays $4.50 in interest each year. Assume this bond is currently trading at $90, below its face value.
If you purchased 100 of these bonds, you would pay $9,000 in total.
Over the life of the bond, you would receive:
- $450 annually in interest (based on the $100 face value)
- $10,000 in principal at maturity (assuming the issuer repays in full)
This means If held to maturity, this would result in a capital gain of $1,000.
This is where Yield to Maturity (YTM) comes in. YTM is the total annualised return you could expect if you purchase a bond today and hold it until maturity. It accounts for:
- The interest (coupon) payments you receive
- Any gain or loss based on the purchase price vs. face value
- The time remaining until maturity
In the example above, although the bond pays 4.5% annually, the purchase at a discount means the overall return is higher. The approximate YTM is 8.11%, combining both the coupon income and the capital gain.
YTM is considered the benchmark for bond returns because it’s the most comprehensive measure of what you stand to earn over the bond’s life. It allows investors to compare bonds with different:
- Prices (trading at a discount, premium, or par)
- Maturities (short-term vs. long-term)
- Coupon rates (low vs. high)
Regardless of a bond’s structure, YTM gives you a single, consistent number that reflects its true return potential—assuming you hold it to maturity and all payments are made as expected.
That’s why professional investors and portfolio managers rely on YTM as the key metric when evaluating and comparing fixed income investments. It provides a full view of return—not just the income, but also the gain or loss tied to the bond’s price.
In Summary:
Yield to Maturity provides a single annual return figure that encompasses income, capital gain/loss, and time. This metric can be useful when comparing different bonds or considering whether a bond represents value at its current price. YTM is often considered a primary measure for total return in fixed income investing.
*Data accurate as at 06.06.2025
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