Australian Bond Exchange

Australian Bond Exchange Weekly Update

Friday 23rd June 2023

Key Points

  • Bank of England hikes the cash rate half a percentage point to 5%, to fight sticky 8.7% inflation recorded in the year to April and in the year to May.
  • RBA releases the minutes from the June monetary policy meeting, with upside risks to inflation the prominent reason for hiking another 25bps, despite financial pressures. 
  • Australian and U.S. bond yields are rising in response to ever-increasing interest rates, making equities a less attractive option than the bond yields currently on offer. 
  • CBA data shows the mortgage cliff has arrived, as over 850,000 Aussies face up to $15,000 more in mortgage payments each year, despite the rising cost of living. 
  • The Australian bond yield curve returns to positive territory after inverting last week for the first time since the Global Financial Crisis, sparking fears of an imminent recession.  

  Global Cash Rates & Inflation

Inflation Pressures Drive Rate Hikes

This week, the Bank of England (BOE) responded to sticky inflation with a surprise 50bps cash rate hike. Following Australia’s recent 25bps hike in early June, the UK, Australia, and many other advanced economies just cannot shake this high inflation.

CPI data for the UK drove the BOE’s decision to take the UK cash rate to 5%, as the rate of inflation stayed strong, recording an 8.7% average increase in prices in the year to April and the year to May. Some commentators are even suggesting that the UK cash rate could reach 6.25% by February 2024.

The Reserve Bank of Australia (RBA) is also on a mission to curb inflation by doing what is necessary to return inflation to target. In the minutes of the June monetary policy meeting released this week – where they hiked the cash rate to 4.1% – it was the upside risks (the risks of an increase) to inflation drove the RBA to their June decision, namely: 


The RBA remains firm in their forecast that the cash rate will not be returned to target until at least mid-2025 and “reaffirmed their determination” to do “what is necessary to achieve that” target range. 

NAB and Westpac took these minutes as a clear signal for more rate hikes, and now predict a 4.6% peak cash rate in August.

As Chief Economist of Westpac Bill Evans states, “As we saw at the June Board meeting, we expect that the July meeting will see these considerations of inflation risks again overriding concerns about the poor growth outlook.” 

Australian and U.S. bond yields on the rise 

As rising interest rates wreak havoc on equities markets and empty the pockets of Aussie homeowners, fixed-income investors are benefiting from the rise in returns.  

According to the RBA, the rate hike contributed to a rise in Australian bond yields “by around 30 basis points over the prior month.” In fact, according the Australian Financial Review, over 25% of investors are confident that bonds will outperform equities this year.    

Roy Keenan, the co-head of Australian Fixed Income at Yarra Capital Management, believes the yields are here to stay, “with cash rates going to 4.1%, and three-year bonds recently hitting a 12-year-high, it’s hard to see [the current levels of yield] not being sustained for the next 18 to 24 months.”  

With a portfolio spanning 106 securities from 50 issuers, Keenan’s advice to achieve a diversified portfolio is to ensure that the risk taken is relative to the value received. 

Source: Financial Times - Click Image to View

By investing a higher portion of his portfolio in lower-yield, higher value businesses, and a smaller amount in higher risk and higher yielding securities, Keenan explained to Livewire that his “goal is to get paid for the risk I’m taking.”  

“If I’m not getting paid for risk,” he continued, “I won’t invest there.” 

When ABE Co-founder Markus Mueller met with Keenan this week, fixed income was on the menu. “We haven’t seen yields like this in a long time,” said Mueller, “bonds are back!” 

It’s the same story for our allies over in the U.S., says Luca Paolini, chief strategist at Pictet Asset Management. “For the first time ever the yield on cash, bonds and equities is the same,” she said. “If you are a US investor you should probably buy bonds because in risk-adjusted terms they give you more.” 

850,000 Aussies Facing the Mortgage Cliff: From 2% to 6% Interest Rates 

Despite commentary that portrayed the move as hawkish (an excessively strict approach to curbing inflation) the minutes released on Tuesday depicted a more balanced decision.  

It seemed to be a much closer call for the RBA, as members considered the struggles of families financially, of renters in cities with low vacancy rates, and in particular the looming mortgage cliff.  

The cliff, which entails over 850,000 Aussie fixed rate mortgage holders switching from interest rates of around 2% to variable rate mortgages of 6%, could see Aussies paying up to $15,000 more in interest each year. 

“The large number of fixed-rate loans scheduled to expire over coming months would see financial conditions tighten further,” the minutes state.  

Based on increases in the cash rate to date, payments were projected to rise to the equivalent of around 10 per cent of household disposable income by the end of 2024.”  

Recent Commonwealth Bank home loan data also confirms that for many of their customers, this fixed-rate mortgage cliff has already arrived. 

What’s coming up next week: 

  • Next Wednesday, the Australian Monthly CPI Indicator will be released on the ABS here, which CBA will be reviewing in order to confirm their cash and interest rate forecasts 
  • Also on Wednesday the U.S. will release the CB Consumer Confidence Report for June here, which will give economists some insight into the impact of rising interest rates.  
  • Next Thursday the U.S. will also release the annualised change in GDP, the primary gauge of economic health, providing some more insight into the effects of rising rates and high inflation. 

The information and data in this article are accurate as at 23.6.2023.

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