Australian Bond Exchange

Australian Bond Exchange Weekly Update

Friday 26th January 

Key points 

  • Highest year-to-date figure for dollar-denominated debt on record
  • Equity markets surge – the Future Fund tips credit
  • Australian business confidence strengthens
  • U.S. consumer confidence climbs

Global Cash Rates & Inflation 

Insatiable Demand for Corporate Bonds

Demand for corporate bonds is booming with over $150 billion in investment-grade debt issued and gobbled up since the start of 2024.

Not only is this the highest year-to-date figure for dollar-denominated debt on record, but it also provides a glimmer of insight into the thinking of investors who are eager to lock in attractive rates.

From the issuer’s perspective, with borrowing rates already more cost-effective than just a few months ago, some corporates are making moves to secure lower funding rates now.

U.S. bond markets anticipate that rates will head lower throughout the year, a view that is shared widely among economists and Federal Reserve officials alike – although the timing of such rate cuts are disputed.

Source: Financial Times 

Equity Markets Surge – The Future Fund Tips Credit 

While corporate debt is undoubtedly attracting a lot of investor attention, it isn’t the only market. 

Just last week, the U.S. S&P 500 and tech-dominant Nasdaq 100 hit all-time highs and are now trading on 22 times and 26 times estimated earnings respectively. 

Considering the 10-year average price-to-earnings ratio for the S&P 500 is approximately 17.87, and 28.26 for the Nasdaq 100, some investors are treating equities with a degree of caution, given the lofty valuations. 

Raphael Arndt, Chief Executive Officer of Australia’s Future Fund concurs with this view and believes there are far better ways than large and mega-cap equities to take on risk.  

“They’re not cheap, and they’re pricing in quite a bit of growth. It’s hard to see a world where that growth will come through, especially if interest rates stay higher than the market’s expecting” 

Raphael Ardnt, Chief Executive Officer, Future Fund 

As Australia’s sovereign wealth fund, the purpose of the Future Fund is to invest for the benefit of future generations of Australian. The Future Fund’s biggest portfolio shift right now is towards floating rate credit which now compromises more than 10% of the fund. 

This was an interesting revelation considering it was only in August 2023 when the Future Fund announced it was pushing heavily into high-grade corporate debt and would double its exposure to $1 billion.  

By the end of 2023, the Future Fund reported it had a total of $273.3 billion in funds under management, suggesting that approximately $27 billion is now already allocated to corporate debt – a sizeable increase.  

Australian Business Confidence Strengthens 

Business confidence picked up markedly in December according to data from NAB which saw the Business Confidence Index rise 8 points to -1.

At a sectoral level, mining increased by 28 points while retail increased by 24 points although still remains in negative territory. 

Despite the boost in confidence however, retail profitability continues to slide lower along with the growth in retail price growth.  

The survey results suggest that while cost pressures are continuing to ease, profitability is also coming under pressure which could ultimately dampen the bullish momentum in Australian equities. 

U.S. Consumer Confidence Climbs  

Data released from the University of Michigan reveals that consumer confidence is picking up with the index rising 13% and reaching its highest level since July 2021. Year over year, sentiment was up 21.4% from January 2023 levels. 

According to respondents, nearly 30% expect interest rates to decline alongside “looser financial conditions and borrowing rates” which would bolster the case for higher consumer spending throughout 2024. 

Final Thoughts 

They key consideration for investors is will the Federal Reserve and other central banks cut as quickly and aggressively as bond markets believe.

Bond futures are pricing in six rate reductions of 25 basis points by the end of the year and with U.S, equities at all time highs (and Australian equities just below), it seems that high levels of exuberance is manifesting.  

A great deal will hinge on the incoming inflation data over the coming months as to whether equities can justify such lofty valuations. 

On the corporate fixed-income front, whether interest rates come down as soon as markets are expecting or not, we think getting paid to wait with returns of 6-8%pa is an undeniably attractive proposition.  

For more information about our available products, speak to an Australian Bond Exchange adviser today.  

Week Ahead 

  • Federal Reserve interest rate decision   
  • Australian yearly inflation data  
  • Bank of England interest rate decision  
  • Euro Area GDP growth   
  • Euro Area inflation rate  
  • U.S. unemployment, non-farm payrolls and manufacturing PMIs

*Data accurate as at 25.01.2024

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