Australian Bond Exchange Weekly Update
23rd May 2025
Key Points
- Australia: The Reserve Bank of Australia (RBA) has cut the cash rate by 0.25% pa, bringing it down to 3.85%pa . Inflation for the March quarter was 2.4%pa, with the trimmed mean at 2.9%pa.
- United States: The Federal Reserve held its target cash rate steady at 4.25%pa–4.50%pa. April’s headline inflation came in at 2.3%pa year-on-year, while core inflation (excluding food and energy) rose 2.8%pa.
- United Kingdom: The Bank of England (BoE) reduced its Bank Rate by 0.25%pa to 4.25%pa. March inflation eased to 2.6%pa, down from 2.8%pa in February.
- Eurozone: The European Central Bank (ECB) lowered interest rates by 0.25%pa to 2.25%pa. Inflation in March moderated to 2.2%pa, down slightly from 2.3%pa in February.
Market Insights
- The U.S. loses its AAA credit rating.
- RBA cuts interest rates by 0.25%pa to 3.85%pa, as expected.
- Bond Face Value – What does this mean?
The US loses its AAA rating
One of the most notable developments this week was the downgrade of the United States’ long-term credit rating by all three major agencies—Moody’s, Fitch, and S&P—from AAA to AA+. The move stems from rising fiscal risks and ongoing political gridlock in Washington.
While the downgrades have not caused immediate market uncertainty, the recent soft demand for a US$16 billion sale of 20-year bonds has. Major stock indexes fell on Wednesday and bond markets sold off with the all important 30-year US Treasury bond yield increasing to over 5% which is a major reference benchmark for US mortgage rates.
The US debt servicing costs are starting to exceed US$1 trillion and are projected to become the largest component of the US Federal budget in the coming years.
RBA as expected decreased cash rates by 0.25%pa to 3.85%pa
The Reserve Bank of Australia (RBA) has cut the cash rate to 3.85%pa , marking its second rate cut of the year. This decision reflects the RBA’s growing confidence that inflation is under control and that the economy can manage a more accommodative monetary policy.
Governor Michele Bullock confirmed that the board even discussed the possibility of a 50bps cut, indicating that a larger reduction was on the table.
The RBA has indicated that further rate cuts could be possible, depending on future economic developments. Market expectations suggest an additional 0.55 percentage points in cuts by the end of 2025, bringing the cash rate to approximately 3.30%.
Explained: What Is Face Value?
As part of our educational focus this week, let’s explore the concept of “Face Value”—a term that frequently appears in discussions around bonds and other debt securities.
Face value, also known as par value, refers to the amount stated on the front of a debt security. For a security, this is the amount the issuer promises to repay the holder at maturity. For example, in a fixed-coupon security, the coupon payments remain constant and are calculated based on the face value — regardless of changes in interest rates or market price.
The term originates from the 19th century, when financial instruments like bonds and promissory notes were issued as physical certificates. The nominal value was literally printed on the “face” of the document.
In contrast, the market price of a debt security can fluctuate based on supply and demand, interest rate movements, and credit risk. If a bond is trading below its face value, it’s trading at a discount; if it’s trading above, it is trading at a premium. Investors use this difference between market price and face value to calculate key metrics like yield to maturity (YTM), which helps assess potential returns.
Understanding the distinction between face value and market price is crucial, especially when evaluating bond investments or comparing securities across different issuers.
*Data accurate as at 23.05.2025
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